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Cullins Discusses Impact of Operating Partnership Units on REITs

01/10/2014 | By Allen Kenney

John Cullns, a partner with the law firm Ernst & Young LLP, joined REIT.com for a video interview at REITWorld 2013: NAREIT’s Annual Convention for All Things REIT at the San Francisco Marriott Marquis.

Cullins discussed the role that operating partnership units (OPUs) and the UPREIT structure played in the growth and evolution of the REIT industry 20 years after a wave of commercial real estate companies held initial public offerings (IPOs).

“Realistically, I don’t know that we could have had the transformation that we had that really started 20 years ago from private to public without the operating partnership structure,” Cullins said.

Cullins explained that the ability for sellers to defer tax liability on the transactions helped spur the industry’s growth.

For many real estate owners who had built-in gains, “to incur a tax liability in connection with the formation transaction, they would have had to have the cash to pay the taxes,” Cullins noted. “You start pulling the cash out of the transaction, and it makes it difficult to make all the numbers work. It was an opportunity on a tax-deferred basis to transform from private to public in a way that continued to align the interests of the sponsors and the public coming in. Without that tax-deferral aspect, I don’t see how this would have happened.”

Cullins also discussed some of the different ways in which REITs are using OPUs now.

“They’re still using it as acquisition currency,” he said. “It’s a wonderful, flexible tool. It’s still just fundamentally a partnership. You’re talking about people that can contribute their properties into a partnership on a tax-deferred basis. That’s well established. You’ll see some people even do it for estate-planning purposes—to set it up where, perhaps over an extended period of time, that might be deferred and go through their estate. You’re still seeing it used today. We’ve gotten a lot better at it. Still, a lot of the same motivations that were there 20 years ago are there today. It’s a great, flexible deferral tool that allows you to contribute your assets into an UPREIT partnership and, in effect, have an interest in a much larger pool of properties.”