How to leverage 721 UPREITs for portfolio diversification?

A UPREIT stands for an umbrella partnership real estate investment trust; the “721” refers to Section 721 tax law governing these transactions. In a 721 UPREIT structure, property owners contribute their real estate assets to an operating partnership (OP) in exchange for OP units. The OP is controlled by a Real Estate Investment Trust (REIT), the general partner. This structure allows property owners to defer paying capital gains taxes when selling their property, as OP units are generally considered a tax-deferred transaction under Section 721.

Power of diversification with 721 UPREITs

Let’s look at how 721 UPREITs is leveraged for portfolio diversification:

1. Access to institutional-grade properties

The primary advantage of 721 UPREITs is that they allow individual investors to gain exposure without paying higher rates. By contributing your property to a UPREIT, you gain ownership of high-quality real estate assets, including office buildings, multifamily complexes, retail centres, industrial facilities, and more.

2. Geographic diversification

Many investors find their real estate holdings concentrated in a single market or region. 721 UPREITs offer the opportunity to diversify geographically. By exchanging your property for OP units in a REIT with a national or even international portfolio, you spread your risk across multiple markets. Geographic diversification can insulate your investments from localized economic downturns or market-specific risks.

3. Property type diversification

The following diversification aspect is spreading your investments across different real estate types. For example, if you’ve primarily invested in residential properties, a 721 UPREIT exposes you to commercial, industrial, or specialized real estate sectors. This diversification across property types helps balance your portfolio and potentially reduce overall risk.

4. Professional management

When you contribute your property to a UPREIT, you diversify your holdings and gain access to professional management. REITs typically have experienced teams dedicated to property acquisition, management, and disposition. This expertise is precious if you want to reduce your active involvement in property management or want exposure to asset classes outside your expertise.

5. Liquidity options

While direct real estate investments are illiquid, 721 UPREITs offer increased liquidity options. After a specified holding period, OP units are often converted to publicly traded REIT shares. With future liquidity, you will have greater flexibility in your investment strategy and the ability to rebalance your portfolio.

Strategies for leveraging 721 UPREIT opportunities

• Identify your diversification goals – Clearly define your objectives before pursuing a 721 UPREIT transaction. Are you looking to gain exposure to new geographic markets? Do you want to diversify across property types? Assessing UPREIT partners and opportunities more effectively.
• Research potential UPREIT partners – Take the time to research potential REIT partners thoroughly. Look at their track record, portfolio composition, management team, and financial performance. Consider factors such as dividend history, growth strategy, and alignment with your investment goals.
• Evaluate tax implications – While 721 UPREITs offer tax deferral benefits, it’s crucial to understand the long-term tax implications of the transaction. Consult with tax professionals with experience in UPREIT structures to ensure you fully understand the potential tax consequences and benefits.
• Plan for the long term – While 721 UPREITs offer immediate diversification benefits, it’s essential to approach these transactions with a long-term perspective. Consider how the UPREIT structure aligns with your investment strategy, retirement plans, and estate planning goals.

Consider how 721 UPREIT Opportunities align with your financial goals, risk tolerance, and investment timeline. With careful planning and expert guidance, 721 UPREITs is valuable in building a well-diversified, robust real estate investment portfolio.