FLASH SALE! - "FINANCIAL MODELING COURSE BUNDLE AT 60% OFF" Enroll Now

UPREIT Vs DOWNREIT

Updated on April 17, 2024
Article byKhalid Ahmed
Edited byAlfina
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between UPREIT And DOWNREIT 

The primary difference between a UPREIT and a DOWNREIT lies in the transfer of ownership and control of real estate assets. A UPREIT system comprises a partnership between a publicly traded Real Estate Investment Trust (REIT) and the property owner, where partnership units get transferred to the property owner for contributing their property into a partnership. In contrast, DOWNREIT involves partnership creation between REIT and its subsidiary unit, giving ownership to the subsidiary while leasing it back to REIT. 

Key Takeaways

  • UPREIT allows property owners to contribute their property to a partnership with a REIT and receive operating partnership (OP) units.
  • It benefits all parties by providing real estate diversification, liquidity, tax deferment, finance for acquisitions, and multiple sources of income for the REIT.
  • DOWNREIT allows property owners to hand over their property to a subsidiary of a publicly listed REIT for leasing to the REIT while retaining ownership units in the created entity and obtaining tax benefits.
  • The REIT also benefits from tax benefits and a way to acquire real estate properties without paying a premium.

Comparative Table

Let us use the table below to understand the basic differences between the two:

FeatureUPREITDOWNREIT
DefinitionIt represents a partnership between a publicly traded REIT and a property owner.A partnership between REIT and its subsidiary entity regarding the property.
Ownership StructurePartnership receives the property from the owner of the property.Partnership gets the leased ownership of the property from the subsidiary of the REIT.
Transfer of ControlTransfer of ownership and control happens from the property owner to the REIT.No real transfer of ownership and transfer happens to the REIT but remains with the subsidiary.
TaxationThe property gets the ability to defer taxes on their property-on-property appreciation.A property owner does not have any such taxation benefits.
Benefits for Property OwnerIt benefits the property owner by converting the property into revenue-generating security.It facilitates the subsidiary to raise capital for mergers and acquisitions.
Capital RaisingIt helps REITs to raise capital for upcoming acquisitions.Here the subsidiary can raise capital for future acquisitions.
LiquidityIt acts as a key tool to transform one’s property into liquid assets.The subsidiary entity does not receive any such liquidity benefits.
Investor AccessInvestors get access to a widely diversified real estate portfolio of REITs directly.Investors get access to a widely diversified real estate portfolio of REIT indirectly.
Legal StructureIt is formed by a legal partnership agreement between the REIT and the property owner.Here, the subsidiary can raise capital for future acquisitions.
AvailabilityMoreover, it has a presence in most regions.It is not present in all regions.

What Is UPREIT?

UPREIT stands for Umbrella Partnership Real Estate Investment Trust. It is an investment structure allowing property owners to contribute to the partnership with REIT and get operating partnership (OP) units, which are exposed to maximum benefits that come from the REIT shares. 

It benefits the investor, owner, and REIT in the following manner:

  1. An investor gets exposure to real estate portfolio diversification. 
  2. The property owner gets the liquidity of their property.
  3. The property owner gets the tax deferment benefits.
  4. Property owners get to invest in REITs without selling their property. 
  5. Property owners do not have to pay capital gains tax.
  6. REIT gets to raise finance for future acquisitions.
  7. REIT gets the ownership and control of the property.
  8. Hence, REITs get multiple sources of income through management, leasing and other activities.

On the whole, it acts as a key factor in unleashing the potential values of a property to its owner through getting an opportunity to invest in a publicly traded REIT. Meanwhile, it also provides tax benefits to the owner.

What Is DOWNREIT?

DOWNREIT refers to an arrangement between the property owner and subsidiary of a publicly listed REIT of handing over the property to a subsidiary for further leasing it to the REIT. The property owner does not contribute anything towards the partnership with REIT. Such a subsidiary usually exists in the form of a limited partnership (LP) or as a limited liability company (LLC). However, the property owner gets the ownership nits in the entity created in place of the contributed property. 

Hence, the subsidiary LLC or LP then leases the property to the REIT, leading to income generation via management, leasing or another activity. Furthermore, it does not take away ownership and control from the property owner while also giving them a solid way of income stream to them.

Moreover, it also provides tax benefits to the owner of the property. In addition, REITs get a way to acquire real estate properties without paying any premium for them. REIT also gets taxation benefits for the arrangement with its subsidiary.

Similarities

Here are the similarities between the two:

FeatureUPREITDOWNREIT
Partnership StructureBoth have structured partnerships between different entities.Both involve REIT and its subsidiary as partners.
Real Estate OwnershipBoth involve real estate asset ownership.Both allow the transformation of real estate assets into income-generating securities.
Investor AccessBoth involve REIT and its subsidiaries as partners.Both can be used to raise capital for future growth and acquisitions
Legal RequirementsBoth have to meet the legal requirements of a partnership agreementBoth need to comply with securities regulations and laws.
Tax ImplicationsBoth have tax implications for the stakeholders of the partnershipBoth offer taxation benefits to investors.
Diversification BenefitsBoth help in risk mitigation while also diversifying the real estate portfolio.Both give liquidity benefits to the partnership signatories.

This article has been a guide to UPREIT vs DOWNREIT. Here, we explain their definitions, differences, and similarities between them, and a comparative table. You may also find some useful articles here –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *