What is a 721 UpREIT?

Wallace:
We’ve seen a lot more 721 UPREITs being introduced and available. It’s like any of the big companies are trying to position themselves to have one. Could you talk a little bit about UPREITs?

Brandon:
Yeah. So it used to be the primary exit strategy for these programs would be you would sell the DST property to a third party prior to the loan maturity and then investors would be able to do a subsequent 1031 exchange, or they’d be able to cash out and pay the taxes, whatever was optimal for them. That’s still one of the potential access strategies for most programs, but more and more we’re seeing sponsors essentially structure an option that their affiliated REIT investment program holds to acquire the property some years down the road, and that would provide an exit for the DST investors and in exchange DST investors would be able to do something called a Section 721 tax deferred exchange into the REIT, or the operating partnership of the REIT, and so essentially it would give investors a sort of a diversification opportunity. So instead of owning an interest in a single property or small portfolio properties, the idea is that you would own an interest in a large REIT that might have a pretty diverse portfolio.

Brandon:
One thing you got to keep in mind with that kind of thing is some DST programs provide investors optionality to choose kind of which path they want to go down should that REIT program exercise its purchase option. Other programs do not, so you have know that in advance.

Wallace:
Right.

Brandon:
Am I going to have optionality or am I going to be converted, essentially, into a REIT reinvestment?

Wallace:
Right. Or it’s conditional, if they fail to meet some goals and they go into a hyper amortization phase. That’s another similar loss of the option. It’s not automatic. You got to be careful. If you want an exit with a 1031, you got to make sure you’re not going to lose that.

Brandon:
Right. Right. You really got … Yep, exactly. So, I mean, that’s a key part of due diligence. I know we’re getting ahead of ourselves a little bit, but that’s just … Kind of knowing the mechanics of how the back end works is critical.

Wallace:
You bet. Well, and I think just to kind of summarize that 721. Somebody has a property, it could have been a condo or a small office building or whatever they want, they can do a 1031 into a Delaware Statutory Trust, the sponsor of which also has a large REIT, real estate investment trust. At some point, usually it’s after, I think it’s after the third year, is typically when that would happen or no. It’s after the second year that would happen.

Brandon:
And it can vary. Yep. It can vary from sponsor to sponsor on that timeframe.

Wallace:
I think most of them use that two years as a kind of a safety zone. I don’t know that’s written down anywhere, but at least two years, and then what they would do is convert their share, actually contribute it, I think technically, to the REIT for operating partnership units and that can then end up giving them some liquidity that they would not otherwise have. That’s still not a taxable event, but when they go then, if they wanted some liquidity, let’s say they’ve got a million dollar DST. It’s not an all or nothing deal that they’re going to sell it and have to take that tax hit all at once. They could go into the 721 UPREIT and then if they wanted to liquidate $50,000, $100,000 a year and have much more control over their taxes, those are some of the appeals that we see, especially with the financial planning that we do at our company.