The UpREIT structure can provide a number of advantages over a typical all-cash real estate transaction, including the following: ■ Tax-Advantaged Consideration – The most significant benefit of operating through an UpREIT structure is the ability to issue securities (i.e., OP Units) on a tax-deferred basis to sellers of real property in connection with property acquisitions. When contemplating the disposition of real property, sellers who have a low tax basis in the property may be reluctant to sell for cash or REIT shares because the sale would trigger significant tax liability. By accepting OP Units as consideration for the contribution of their properties, sellers can defer the tax on the built-in gains, generally until they elect to tender their OP Units for redemption. Under certain circumstances, sellers may even be able to extract some cash in the transaction on a tax-deferred basis as well. Furthermore, OP Unitholders may also tender their OP Units over time, thereby spreading out their tax liability. OP Units also provide favorable tax benefits for estate planning purposes. ■ Enhanced Liquidity – Unlike real property, for which there is limited liquidity, an OP Unitholder has the ability to obtain liquidity “on demand” by exercising its redemption rights. Pursuant to the partnership agreement, OP Unitholders typically have the right to tender their OP Units to the Operating Partnership for redemption. OP Unitholders generally must wait a certain period of time before they can exercise their redemption rights (typically, six months to one year from the date of the issuance), but once the holding period has been satisfied, OP Unitholders generally can tender OP Units at times, and in amounts, of their choosing, subject to applicable limitations set forth in the partnership agreement and tax considerations. Although the redemption of OP Units will trigger the recognition of the taxable gain that was deferred at the time of the property contribution, OP Unitholders have the flexibility to decide when to monetize their holdings and, accordingly, when the tax liability will be triggered. Additionally, for federal securities law purposes, OP Unitholders who redeem their OP Units for shares will get to tack the period of time they held the OP Units to the Common Shares and be able to immediately take advantage of the resale provisions provided under Rule 144 of the Securities Act. ■ Current Income Through Distributions – Holders of common OP Units generally receive the same quarterly distribution payments in respect of their OP Units as stockholders receive in respect of their REIT shares, and those payments usually occur at the same time. As a result, the ownership of OP Units generally provides holders with current income in the form of regular (typically quarterly) cash distributions. ■ Liability Allocations – As a partner in the Operating Partnership, an OP Unitholder will receive an allocation, for income tax purposes, of the liabilities of the Operating Partnership. An OP Unitholder’s adjusted tax basis in his or her OP Units will be increased by the amount of such allocation. Among other things, an increased tax basis from an allocation of liabilities may enhance an OP Unitholder’s ability to (i) receive cash distributions in excess of earnings on a tax deferred basis and (ii) absorb and use net losses, if any, generated by the Operating Partnership. 2024 Guide to REIT IPOs and Listing Transactions | 20
RkJQdWJsaXNoZXIy NTU5OTQ5