What Is DownREIT?
DownREIT is a joint endeavor between a real assets owner and a real assets investment believe (REIT) for the purpose of acquiring and controlling exact assets.
Key Takeaways
- A DownREIT is a partnership agreement between an REIT and a real assets owner that permits deferring of tax on sale of liked exact assets.
- There are two sorts of DownREITs. The principle sort involves limited to no capital contributions from REITs while the second sort involves essential capital contribution thru REITs.
- DownREITs are further subtle as compared to UPREITs and could have tax implications, if the working unit is regarded as a security in the course of the IRS.
Understanding DownREIT
DownREIT involves a partnership affiliation between a real assets owner and the (REIT) that assists the real assets owner in deferring capital just right issues tax on the sale of liked exact assets. The UPREIT was once invented after the real assets recession of the 1990s to facilitate investment of capital into the real assets business. DownREIT complicated out of the UPREIT.
Precise assets homeowners who contribute property to DownREITs download working units in a partnership. This partnership entity and the property owner’s courting to it can be structured in moderately a couple of different ways, depending on the development of the REIT and any UPREITs that may exist. In a DownREIT, the REIT has to evolve to a standstill or lockout agreement available on the market of contributed property.
There are two sorts of DownREIT partnership categories. Inside the first type of partnership, the REIT provides limited to no capital and limited partners download preferences on distribution of working cash in an amount an identical to REIT share dividends. The second elegance of REIT involves contribution of essential capital in the course of the REIT. The entire partner receives distribution an identical to return of capital.
DownREIT Compared to UPREIT
The DownREIT is far much less widely used than the UPREIT because of it is further subtle and may not have the an identical tax advantages as an UPREIT. Contributing property to a DownREIT is a complicated transaction requiring professional tax and investment guidance. If the transaction is not structured with over the top care, the IRS would perhaps consider the transfer of property into the DownREIT in alternate for working units to be a taxable transaction underneath disguised-sale or anti-abuse rules. Due to this fact, an UPREIT may be the additional logical variety for a property owner whose primary fear is to defer income tax criminal duty.
Against this to UPREITs, where ownership of exact assets is not involved, a DownREIT does comprise proudly proudly owning exact assets. A couple of of this property is owned outright, while some may be owned by way of limited partnerships with those who have contributed property to it.
A DownREIT normally is a logical selection if the property owner thinks his exact assets will appreciate more than the REIT’s other holdings, because of he helps to keep a greater interest in his contributed property with a DownREIT than he would with an UPREIT.
That said, given that ownership development of a DownREIT is further complicated, converting working units to cash calls for added complicated calculations. Likewise, UPREITs and DownREITs perform otherwise as investments since they are structured otherwise. With a DownREIT, the partnership between the REIT and the investor can perform otherwise than the potency of the REIT as a complete.
DownREITs are similar to UPREITs, alternatively, in their value as an assets planning instrument. Each and every step up the root of the working units upon the owner’s lack of lifestyles, allowing a tax-free transfer of liked exact assets to heirs. Heirs can then convert the working units into REIT shares or cash without paying tax.
Example of DownREIT
Consider a portfolio of five houses valued at $100 million. The houses have debt an identical to $80 million at 8% interest rate. The partners who private the property have a cumulative capital account stability of $5 million. The REIT enters the transaction and can repay $60 million of present debt for the property and replaces capital account balances for the remainder partners with debt at 7%. Shares are issued as working units for the remainder $20 million held thru partners and the REIT becomes the majority holder while the remainder partners transform GPs and LPs.
