What Is a 721 UPREIT?

Real estate investment is a potentially lucrative field that has attracted many investors over the years. As an investor, you can choose from a range of investment structures that offer different potential benefits and risks. One of these investment structures is the 721 UPREIT (Umbrella Partnership Real Estate Investment Trust).

Before diving into the specifics of a 721 UPREIT, let us first define it.

Definition of a 721 UPREIT

A 721 UPREIT is a type of real estate investment trust (REIT) that allows property owners to exchange their real estate holdings for shares in a partnership or operating company that owns the real estate. This exchange is tax-deferred, which means that the property owner does not have to pay capital gains taxes immediately. Instead, the tax liability is deferred until the owner sells the shares or the partnership sells the underlying property. The transaction is named after Section 721 of the Internal Revenue Code, which permits a tax-deferred exchange of real property for an interest in a partnership.

UPREITs were first created in the 1990s as a way for property owners to defer paying capital gains taxes when exchanging their real estate assets. The 721 UPREIT is a specific type of UPREIT that allows property owners to exchange their real estate holdings for operating partnership units (OPUs). The operating partnership, in turn, owns the real estate assets.

 

How a 721 UPREIT Works

Let us consider an example to understand how a 721 UPREIT works. Suppose you own a rental property worth $1 million, and you want to sell. If you were to sell the property outright, you would have to pay capital gains taxes on the appreciated value of the property. However, exchanging the property for OPUs in an operating partnership can defer the tax liability.

The operating partnership is a tax-deferred entity that owns real estate properties. When you exchange your personal property for OPUs, you become a limited partner in the operating partnership. As a limited partner, you are entitled to a share of the rental income and any profits generated from the sale of the real estate assets.

When the operating partnership sells the underlying property, the capital gains taxes are deferred until the limited partners sell their OPUs. This allows property owners to exchange their real estate holdings for shares in an operating partnership without incurring immediate tax liabilities.

 

Potential Benefits of a 721 UPREIT for Investors

Here are some possible benefits of a 721 UPREIT for real estate investors:

• Tax deferral – One of the primary benefits of a 721 UPREIT is the deferral of capital gains taxes that would be owed on the sale of the property. The exchange is considered a like-kind exchange, which means that the property owner can defer recognizing any gains on the property as long as they hold the OP units.
• Diversified portfolio – By investing in a 721 UPREIT, investors can diversify their real estate holdings. They can exchange their individual property for an interest in a larger, more diversified real estate portfolio, which can help mitigate risks associated with owning a single investment property.
• Liquidity – OP units can eventually be converted into REIT shares, which trade on public exchanges. This gives investors the opportunity to access liquidity when needed. While holding period requirements and other restrictions may exist, converting to publicly-traded REIT shares can be a significant advantage for investors who might otherwise struggle to sell their individual property.
• Professional management – Investors in a 721 UPREIT benefit from professional real estate portfolio This can lead to more efficient operations, better decision-making, and potentially higher returns compared to self-managing a single property.
• Access to institutional-grade assets – REITs often invest in high-quality, institutional-grade real estate assets that may be difficult for individual investors to access. By investing in a 721 UPREIT, investors can gain exposure to these types of like-kind properties and the potential income they generate.
• Income potential – REITs are required to distribute at least 90% of their taxable income to shareholders as dividends. This may provide investors with a steady cash flow, especially compared to the potential income generated by a single rental property.
• Potential appreciation – If the underlying real estate assets in the REIT appreciate in value, so can the value of the OP units and, subsequently, the REIT Investors can benefit from any appreciation of the entire portfoliorather than just their individual property.
• Tax advantages – Investors in a 721 UPREIT can benefit from the tax advantages offered by REITs, such as dividend tax treatment and potential depreciation

While there are clear potential benefits to investing in a 721 UPREIT, it’s essential to understand the potential risks and limitations, such as the holding period requirements, potential tax consequences upon conversion, and lack of control over the specific assets within the REIT’s portfolio. As with any investment, it’s crucial to consult a financial advisor or tax professional before making any decisions.

 

How a 721 UPREIT Differs From Other Real Estate Investment Structures

A 721 UPREIT differs from other real estate investment structures in several ways. Firstly, it offers tax-deferred benefits, which means that investors and property owners do not have to pay capital gains taxes immediately. Secondly, it allows property owners to exchange their real estate holdings for shares in an operating partnership, which provides an exit strategy and diversification.

Compared to other real estate investment trusts (REITs), UPREITs have several advantages. Firstly, they offer greater flexibility in terms of ownership structures. Secondly, they allow property owners to exchange their real estate holdings without incurring immediate tax liabilities. And it allows property owners to exchange their individual property for an interest in a more extensive real estate portfolio managed by a REIT, which can offer unique benefits compared to direct real estate investment, standard REIT investments, or 1031 Exchange.

 

Examples of Successful 721 UPREITs

One of the most successful 721 UPREITs is the Kimco Realty Corporation, which owns and manages a portfolio of retail properties across North America. Kimco Realty Corporation was founded in 1958 and went public in 1991. It has since grown to become one of the largest real estate investment trusts in the United States, with a market capitalization of over $6 billion.

Another successful 721 UPREIT is the Regency Centers Corporation, which owns and operates a portfolio of grocery-anchored shopping centers across the United States. Regency Centers Corporation was founded in 1993 and went public in 1993. It has since grown to become one of the largest real estate investment trusts in the United States, with a market capitalization of over $13 billion.

These examples demonstrate the potential success of investing in a 721 UPREIT. However, it is essential to note that past performance does not guarantee future results and that investing in any investment vehicle carries risks. It is also important work with a professional before investing in order to understand how any investment decision may affect the rest of your financial situation.

 

Potential Risks and Drawbacks of Investing in a 721 UPREIT

Investing in a 721 UPREIT has potential risks and drawbacks that investors should consider before investing. Firstly, investing in a 721 UPREIT involves risks associated with real estate investments, such as changes in the local real estate market and tenant occupancy rates. Secondly, investing in a 721 UPREIT involves risks associated with investing in partnerships, such as conflicts of interest between general partners and limited partners.

Additionally, investing in a 721 UPREIT may involve higher fees and costs compared to investing in other real estate investment structures. This is because UPREITs have more complex ownership structures and require more administrative work. Investors should carefully consider the fees and costs associated with investing in a 721 UPREIT before making an investment decision.

 

Deciding Whether a 721 UPREIT Is Right for You?

Before deciding whether to invest in a 721 UPREIT, investors should consider several factors. Investors should consider their investment objectives and risk tolerance. Investing in a 721 UPREIT involves risks associated with real estate investments and partnerships, which may not be suitable for all investors.

Investors should consider the fees and costs associated with investing in a 721 UPREIT. UPREITs may involve higher fees and costs compared to other real estate investment structures, which can impact an investor’s returns.

Investors should also consider the expertise of the operating partnership. Investing in a 721 UPREIT allows investors to benefit from the expertise of the operating partnership, which has experience in managing and operating real estate assets. Investors should carefully review the track record of the operating partnership and its management team before making an investment decision.