After discussing Umbrella REITs (UPREITS) last week you may ask yourself, “What other kinds of REITs are there?” The DI Wire’s glossary answers this question plus many more definition-related questions you may have!
Although it sounds like the opposite of an UPREIT, DownREITs are actually structured in a similar way. Just like with UPREITs, those who contribute to DownREITs receive operating units in a partnership. The difference is that a DownREIT actually owns and operates real estate unlike UPREITs, which own the interest in a controlled partnership that owns and operates separate properties. Essentially, DownREITs are a joint venture between a REIT and the real estate owner.
DownREITs aren’t used as much because the transaction is more complicated in terms of being taxed and must be structured very carefully to avoid taxation. DownREITs are a good option for those who think their property may appreciate more than other properties in a REIT. This gives the property owner greater interest than an UPREIT.
DownREITs have the same advantages as UPREITs when it comes to estate planning. In the event of the owner’s death, the operating units can be transferred to an heir and then converted into cash or REIT shares, free of tax.
To learn more about REITs and other terms, visit the DI Wire’s glossary.