An Alternative to Selling Your REIT Securities
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A. B. Nicholas is pleased to announce a new loan program called OpLine, which provides credit line financing against tax-deferred Umbrella Partnership REITS (UPREITs). These are special, custom constructions designed for safety, speed, and value for those interested in creating and leveraging these tax-deferred real estate securities.
What is a REIT & What is an UPREIT
A REIT (short for “Real Estate Investment Trust”) is a corporation with special tax treatment that combines the capital of many investors to acquire and/or provide financing for all forms of real estate. An UPREIT generates tax-deferred Operating Partnership Units that generate a taxable event when sold, and can at least postpone capital gains tax on the sale of the commercial property.
UPREIT OPUs are attractive, therefore, if tax management is an issue. But have been difficult or impossible to tap for cash except for selling, which is often no desirable.
OPLine solves this with a custom credit line against the Operating Partnership Units, allowing you to take payment in the form of OPUs, without having to sell and thereby incur the capital gains taxes that come immediately from the sale of a low-basis property.
How does this help consumers? It does so because buyers who can paying OPUs will be able to “sweeten the deal’ for the client with an offer to pay not in cash, but in tax deferrable OPUs.
Potential Benefits of an UPREIT (Your case may vary):
- Provides a viable tax deferral/avoidance exit strategy to property owners facing large capital gain tax liabilities on the sale of appreciated property.
- Diversification of real estate holdings (i.e., OPU holders can have an interest in a portfolio of several properties instead of just one, REIT style.)
- Potential to convert liquid‚ long-term assets (i.e.‚ real estate) into more easily sold securities (when/if the client chooses to sell them.)
- No property management issues as with straight-up real estate transactions.
- Quarterly income distributions from REIT unaffected, standard
- Potential to recognize unrealized gains as earnings (See your CPA)
- Can ignore many typical real estate risks, such as negative cash flow
- Perfect vehicle for simplifying complex estates.
- Can reduce pressure for buyer to pay more given OPU tax deferral.
- By leveraging with OPLine, you can provide liquidity & flexibility.
- Opens the door to major commercial banking partnership lender.
More on OP Units
Like Stock‚ Almost
From an economic standpoint‚ OP Units are indistinguishable from shares of common stock in the REIT. OPUs are equal in value to the underlying market-trading REIT shares, and fluctuate in value in the same way. OPU holders also receive dividends paid on REIT shares as always. The main difference? OPUs and REIT shares are taxed differently.
Can OPUs be sold?
No, not on a public stock exchange. However, the OPUs parent REIT will typically facilitate the exchange of OPUs for actual REIT stock (the stock playing on the open stock market) either by purchasing the OP Units itself, or by arranging sales to third parties. A long-term hold (say, 5+ years) of the OPU is the only way to ensure that you will make full use of the tax shelter you have earned. See your licensed CPA for more details.
OPU Holders must be “accredited investors” in order for the OPUs to be valid. To be an accredited investor‚ a prospective OPU holder must meet at least one of the following criteria:
- Has andividual annual income in excess of $200‚000; OR
- Has a joint annual income (spouse included) in excess of $300‚000 for each of the last two years; OR
- Has a net worth in excess of $1 million (individually or jointly with spouse); OR
- Is a Trust or approved Trust-like entity having assets in excess of $5‚000‚000.
Check with your accountant or other licensed tax professional to determine your status.
Good candidates for UPREIT transactions?
The following real estate holdings are considered good candidates for an UPREIT transaction:
- Family-owned properties with unresolved succession issues
- Properties with third-party tenants
- Partnerships that need to be dissolved
- Long-term assets with very low basis
- Surplus property generated by consolidations
- Property owners concerned they have too much of their net worth tied up in real estate
Please note that A. B. Nicholas can refer you to a licensed real estate attorney with comprehensive knowledge of UPREITs if you prefer. (Above descriptions of UPREIT and tax issues courtesy of Broadstone Real Estate of Rochester, NY)
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