DownREIT

Definition of 'DownREIT'


A joint venture between a real estate owner and a real estate investment trust (REIT) that assists the real estate owner in deferring capital gains tax on the sale of appreciated real estate. Real estate owners who contribute property to DownREITs receive operating units in a partnership. Unlike UPREITs - which do not own real estate and act basically as an umbrella for a number of business entities that own real estate - a DownREIT does own real estate, some outright and some through limited partnerships with those who have contributed property to it.

Investopedia explains 'DownREIT'



The DownREIT is less widely used than the UPREIT because it is more complicated and may not have the same tax advantages as an UPREIT. Contributing property to a DownREIT is a complex transaction requiring professional tax and investment guidance. If the transaction is not structured with extreme care, the IRS may consider the transfer of property into the DownREIT in exchange for operating units to be a taxable transaction under disguised-sale or anti-abuse rules. Hence, an UPREIT may be the more logical choice for a property owner whose primary concern is to defer income tax liability.

However, a DownREIT can be a logical option if the property owner thinks his real estate will appreciate more than the REIT’s other holdings, because he retains a greater interest in his contributed property with a DownREIT than he would with an UPREIT. That said, since the ownership structure of a DownREIT is more complex, converting operating units to cash requires more complex calculations. Likewise, UPREITs and DownREITs perform differently as investments since they are structured differently. With a DownREIT, the partnership between the REIT and the investor can perform differently than the performance of the REIT as a whole. DownREITs are similar to UPREITs, however, in their value as an estate planning tool. Both step up the basis of the operating units upon the owner’s death, allowing a tax-free transfer of appreciated real estate to heirs. Heirs can then convert the operating units into REIT shares or cash without paying tax.




comments powered by Disqus
Hot Definitions
  1. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  2. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  3. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
  4. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
  5. Jeff Bezos

    Self-made billionaire Jeff Bezos is famous for founding online retail giant Amazon.com.
  6. Re-fracking

    Re-fracking is the practice of returning to older wells that had been fracked in the recent past to capitalize on newer, more effective extraction technology. Re-fracking can be effective on especially tight oil deposits – where the shale products low yields – to extend their productivity.
Trading Center