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DownREIT

DownREIT
InvestingAlternative InvestmentsReal Estate Investing

What Is DownREIT?

DownREIT is a joint undertaking between a real estate owner and a real estate investment trust (REIT) to get and controlling real estate.

Grasping DownREIT

DownREIT includes a partnership arrangement between a real estate owner and the (REIT) that helps the real estate owner in conceding capital gains tax on the sale of valued real estate. The UPREIT was designed after the real estate recession of the 1990s to work with investment of capital into the real estate industry. DownREIT advanced out of the UPREIT.

Real estate owners who contribute property to DownREITs receive operating units in a partnership. This partnership entity and the property owner's relationship to it very well may be structured in a wide range of ways, contingent upon the structure of the REIT and any UPREITs that might exist. In a DownREIT, the REIT needs to consent to a standstill or lockout agreement available to be purchased of contributed assets.

There are two types of DownREIT partnership categories. In the first type of partnership, the REIT gives limited to no capital and limited partners receive inclinations on distribution of operating cash in an amount equivalent to REIT share dividends. The second category of REIT includes contribution of huge capital by the REIT. The general partner receives distribution equivalent to return of capital.

DownREIT Compared to UPREIT

The DownREIT is less widely utilized than the UPREIT on the grounds that it is more muddled and might not have a similar tax benefits as an UPREIT. Contributing property to a DownREIT is a complex transaction requiring professional tax and investment guidance. In the event that the transaction isn't structured with extreme care, the IRS might consider the transfer of property into the DownREIT in exchange for operating units to be a taxable transaction under masked sale or hostile to mishandle rules. Thus, an UPREIT might be the more coherent decision for a property owner whose primary concern is to concede income tax liability.

In contrast to UPREITs, where ownership of real estate isn't involved, a DownREIT includes possessing real estate. A portion of this property is owned outright, while some might be owned through limited partnerships with the people who have contributed property to it.

A DownREIT can be a consistent option in the event that the property owner figures his real estate will see the value in more than the REIT's different holdings, since he holds a greater interest in his contributed property with a DownREIT than he would with an UPREIT.

All things considered, since the ownership structure of a DownREIT is more complex, changing operating units over completely to cash requires more complex estimations. Moreover, UPREITs and DownREITs perform distinctively as investments since they are structured in an unexpected way. With a DownREIT, the partnership between the REIT and the investor can perform uniquely in contrast to the performance of the REIT as a whole.

DownREITs are like UPREITs, nonetheless, in their value as an estate planning device. Both step up the basis of the operating units upon the owner's death, permitting a tax-free transfer of valued real estate to heirs. Heirs can then change over the operating units into REIT shares or cash without paying tax.

Illustration of DownREIT

Consider a portfolio of five properties valued at $100 million. The properties have debt equivalent to $80 million at 8% interest rate. The partners who own the property have a cumulative capital account balance of $5 million. The REIT enters the transaction and pays off $60 million of existing debt for the property and replaces capital account balances for the excess partners with debt at 7%. Shares are issued as operating units for the leftover $20 million held by partners and the REIT turns into the majority holder while the excess partners become GPs and LPs.

Features

  • A DownREIT is a partnership agreement between a REIT and a real estate owner that empowers conceding of tax on sale of valued real estate.
  • There are two types of DownREITs. The first type includes limited to no capital contributions from REITs while the subsequent type includes huge capital contribution by REITs.
  • DownREITs are more confounded as compared to UPREITs and can have tax suggestions, in the event that the operating unit is viewed as a security by the IRS.