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Maximizing real estate potential: The rise of UPREITs

April 16, 2025
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Asset managers know there’s more than one way to invest in real estate. Many manage multiple funds with various strategies and structures to provide options for investors. Those choices might include a Delaware statutory trust (DST) or a real estate investment trust (REIT), both of which are tax-advantaged alternative investment products that grew in popularity after the economic crisis of 2007-09.

More recently, sponsors have started equipping their DSTs with an exit strategy that lets investors keep their investment in play without taxation. This is done by converting a less-liquid DST to the operating partnership (OP) of a REIT, while remaining with the same sponsor. These special property-to-OP unit conversions are known as umbrella partnership real estate investment trust transactions, or UPREITs. They have emerged as the latest evolution in the DST space, an estimated $5.5 billion in equity anticipated in 2024, according to data from Mountain Dell Consulting.1

Stable and flexible solutions.

Sponsors employ UPREIT transactions because they create a more stable investment compared to the DST structure, which has tax-related restrictions that limit the ability to hold investments long-term, add capital, and maximize a property’s value. Advisors recommend UPREITs because they offer clients more liquid investment options, tax planning flexibility, and portfolio diversification. And investors value UPREIT transactions for their ability to increase access to economies of scale. These transactions expose investors to larger, diversified, and better-capitalized portfolios managed by REITs through the operating partnership, potentially reducing their exposure to risk.

Why the upward trend in UPREITs? In short: DSTs are maturing, and the UPREIT reflects adoption of a structure commonly used by institutions for decades. As more financial professionals and individual investors learn about this exit option and the potential benefits, the word continues to spread.

Pioneered by Sam Zell in the 1980s, UPREITs have gained traction over the last five years, thanks to sponsors Dividend Capital (now Ares Management), JLL, and others who introduced this DST structure to wirehouses, which have facilitated the majority of UPREIT transactions to date. DSTs typically consist of a single property, have a holding period of about five to seven years, and are largely illiquid. Selling a DST investment to another accredited investor can be logistically difficult, and 1031 Exchanges—"like-kind" exchanges that let investors roll proceeds from one property into another—while also tax-advantaged, are typically less flexible than UPREITs.

The last stop.

Every UPREIT transaction is structured differently, but they allow investors to break out of repetitive cycles of 1031 Exchanges and avoid cashing out early and facing tax consequences.

“An UPREIT is your last stop,” said Jay Frank, President of Cantor Fitzgerald Asset Management. “But it potentially allows investors to get partial liquidity over time from a REIT’s OP. While it can cause a taxable event, it may provide investors additional flexibility and liquidity, which you wouldn’t have in a DST. There are also ways to manage any tax liability created.”

Taxation and administration.

An UPREIT transaction allows investors to exchange property for OP ownership in a standard REIT. These transactions are subject to Title 26, Section 721 of the Internal Revenue Code, which specifies that property-to-share conversions are not generally considered taxable events. Otherwise, UPREIT structures are taxed similarly to that of standard REITs, which are not taxed on most of their earnings, since the taxes are paid by investors when they claim dividends as income.

Following completion of the 721 Exchange, the UPREIT sponsor owns the newly acquired property and manages its administration. In return, the seller gains operating partnership units that can be converted into REIT shares (a taxable event) or put toward other investment strategies. REITs have the potential to generate risk-adjusted returns through rental and other related income. They are required to return 90% of earnings to investors in the form of dividends. While some REITs are traded on public exchanges like NYSE and Nasdaq, non-traded REITs are sold by individual broker-dealers. Investors who UPREIT into a publicly registered non-traded REIT can potentially benefit from the investor protections inherent in public companies, including financial transparency and reporting.

Asset managers have sole discretion over how UPREIT transactions are administered, and they typically dictate in the private placement memorandum whether or not the option is included. These types of exchanges cannot be guaranteed to happen—they’re strictly optional—and a minimum of two years must go by before an investor can elect to make the exchange. The sponsor then dictates when the elected exchange occurs, not the investor. Perhaps another reason 721 Exchanges are on the rise is due to persistent bipartisan scrutiny that 1031 Exchanges have garnered from the last three presidential administrations, all of which have sought to scale back 1031 Exchange tax benefits.

“1031 has been attacked in the past. Under the Tax Cuts and Jobs Act, 1031 was limited to real property and no longer applies to personal property,” said Cantor’s Jay Frank. “Real estate survived, but it could be looked at again. Getting into a REIT structure mitigates the legislative risk of Section 1031—or Section 721—being materially altered.”

Educating investors on risks.

As with any real estate investment, especially alternative investments like DSTs and REITs, there are a number of risk factors that should be considered, such as declines in market value, local economic conditions, operating costs, and more. Current economic conditions around real estate underscore the importance of educating investors on the long-term nature of alts.

1 Mari Nicholson, "DST Fundraising Bounces Back in October, a 32% Increase Month-Over-Month, AltsWire, Nov. 12, 2024. 

More insights on alternatives.

Important Information

Information provided by SEI through its affiliates and subsidiaries. This information is for educational purposes only and should not be considered investment advice. The strategies discussed herein are complex and are not suitable for all investors.

 Neither SEI nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.