What are DownREITs
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UpREITs are innovative business structures that take advantage of the "like-kind" property exchange provisions of the U.S. tax code to enable property owners to pull cash and estate planning benefits from their properties, without immediately generating large capital gains tax liabilities. However, they come with a few problems that DownREITs can solve.
First, allowing members of the REIT's management team to hold units in the Operating Partnership as individuals can make for potential conflicts of interest, where the best interests of these limited partners do not match the best interests of the REIT's shareholders.
For example, if a larger REIT wanted to buy the REIT for a desireable price, the shareholders may be all in favor of such a buyout. However, management members might not agree, since it would force them to pay onerous taxes on the OP units they own.
DownREITs are Better for REIT Shareholders Than UPREITs
In a DownREIT, REIT management members don't own units in the Operating Partnership, so there are no potential conflicts of interest.
Also, DownREITs typically take place after the REIT has been in business for some time, and is used as a tool to acquire desireable properties.
Typically, the DownREIT Operating Partnership owns/manages only the properties acquired. The REIT's other real estate properties are still owned directly by the REIT and its shareholders.
So using the DownREIT strategy is simply one more tool for the REIT's management to expand the company.
In contrast, with an UPREIT, the OP also holds the entire REIT company itself.
Next: What are Paired-Share Real Estate Investment Trusts -- a REIT and C corporation all in one.
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