The Benefits of Doing an UPREIT

LOS ANGELES—In 2015, rising prices gave way to a huge increase in 1031 exchanges as a way for investors to defer capital gains taxes. In some cases, we even saw investors moving capital out of multifamily and into product where they could increase cash flow and get a better yield—but other product types don't have that option. In an earlier story, GlobeSt.com reported that Plaza International sold its Warner Plaza shopping center for $76 million in an UPREIT transaction, which allowed the investor to avoid capital gains taxes, just like a 1031 exchange, in exchange for shares of a public company. With an ever-dwindling supply and compressing cap rates, we may see more of these transaction types this year.

"Part of the problem that we have seen over the last 18 months is a lack of product," Kyle Miller, senior managing director at Savills Studley, tells GlobeSt.com. "Anyone going into a large sale and wanting to do a 1031 exchange and abide by the 45-day timeline, it is going to be challenging because there is not a lot of product out there to choose from. When you compare 1031 exchanges to an UPREIT, the underlying mechanism is the same because the investor is able to defer capital gains taxes.

Other reasons that someone would choose an UPREIT over a 1031 exchange is estate planning. Shares of a publicly traded company are easily passed on through estate planning. There are a lot of benefits to that." Miller represented Plaza International in its recent UPREIT transaction.

The increase in 1031 exchanges last year was largely for multifamily product, according to Miller. "We have definitely seen a huge influx of 1031 exchanges, and there are a lot of different driving factors for that. In the retail market, we are seeing a huge influx of 1031 capital coming out of multifamily. That is probably because multifamily is one of the hottest product types out there, and you are seeing compressed cap rates," he says. "An owner of multifamily that can sell at a 3 cap and buy at a 5 cap, that is a win; that is a nice arbitrage that allows them to increase their cash flow. That is why you have seen so much 1031 transactions out there." For retail owners, or owners of other property types, trading into multifamily can be much more difficult. 

However, this isn't necessarily an indication that there will be a huge increase in UPREIT transactions or that they will rival 1031 exchanges. "It is definitely in the conversation," says Miller. "I think you will start to see more of these transactions, but I don't know if it will become commonplace."