UPREIT: What It Is and How it Works

What is an UPREIT?

An UPREIT is an Umbrella Partnership Real Estate Investment Trust structure that lets property owners contribute real estate into a tax-deferred partnership while receiving Operating Partnership (OP) units instead of selling for cash. 

A newly formed or existing REIT is the general partner and majority owner of the OP; legacy owners become limited partners holding OP units proportional to the value they contributed. The OP, not the REIT directly, holds the properties—allowing owners to defer capital gains while gaining exposure to a diversified, professionally managed portfolio.

How a Typical UPREIT Transaction Works

• Form the Operating Partnership (OP): A REIT becomes the OP’s general partner and majority owner.
• Contribute assets and cash: Property owners (or existing partnerships) contribute properties for OP units, while the REIT contributes capital (often from a public offering).
• Liquidity pathway: After a stated period (commonly about one year), OP unitholders may tender units for cash or REIT shares (at the REIT/OP’s option). This exchange generally triggers the deferred taxes associated with the original contribution.
• Tax planning flexibility: Unitholders can stagger redemptions over time to spread tax. If units are held until death, estate tax rules can allow heirs to exchange units for cash or REIT shares without income tax, thanks to basis step-up rules (per standard UPREIT mechanics described by industry sources).

Why Owners Consider an UPREIT

Tax deferral on appreciated assets

Contributing property for OP units can defer recognition of capital gains, avoiding an immediate taxable sale while still converting illiquid real estate into marketable exposure to a REIT platform.

Liquidity and diversification

Once eligible, exchanging OP units for REIT shares or cash provides a path to liquidity and diversified income streams from a broader portfolio than any single asset.

Estate planning advantages

Basis step-up at death can eliminate the deferred gain for heirs when units are later exchanged, aligning the structure with multigenerational wealth planning.

Professional management and scale

Owners benefit from institutional asset management, access to capital, and reduced concentration risk relative to holding a single property.

Key Considerations Before Using an UPREIT

Control and governance

OP unitholders are limited partners; day-to-day decisions rest with the REIT as general partner. Understand voting rights, protective provisions, and reporting.

Valuation and exchange mechanics

Your OP unit count and any unit-to-share exchange ratio hinge on property valuation at contribution. Independent valuations and clear documentation are essential.

Distribution policy and taxes

OP distributions generally mirror REIT dividends, but your tax profile differs from shareholders until units are exchanged. Coordinate with tax advisors on timing and cash flow.

Timing and lockups

Expect holding periods before exchanges, plus potential REIT/OP choice of cash vs. shares on redemption—planning matters for liquidity and tax outcomes.

UPREIT vs. Traditional REIT Ownership

In a traditional REIT, the REIT directly owns properties. In an UPREIT, the REIT owns a controlling interest in the OP, and the OP owns the properties. Economically, shareholders still receive REIT dividends, while OP unitholders participate through unit distributions with a path to convert into REIT shares or cash later. 

For searchers asking “what is UPREIT”, think of it as a tax-efficient bridge between direct ownership and REIT ownership.

Is an UPREIT Right for You?

If you own highly appreciated commercial real estate, want tax deferral, seek diversification and liquidity, and value estate planning flexibility, an UPREIT may be a fit. The right answer depends on asset profile, basis, debt, time horizon, and income needs—align the structure with your goals and tax strategy.

Considering a contribution, sale, or recap? IPG can help you evaluate UPREIT vs. alternatives and structure a path that fits your portfolio and tax objectives.