12/16/2013 | by Allen Kenney
Operating Partnership Units and REITs

Doug Meece, first vice president with Morgan Stanley Wealth Management, joined reit.com for a video interview at REITWorld 2013: Nareit’s Annual Convention for All Things REIT at the San Francisco Marriott Marquis.

Meece discussed the birth of operating partnership units and how the UPREIT structure helped usher in the modern REIT era 20 years ago.

“The use of the UPREIT structure was primarily tax-driven. The goal was to really allow owners of real estate assets to transfer their investments into a vehicle that would allow them to do so without triggering a tax that would normally be incurred,” Meece said. “Also, it was beneficial for the owners of the real estate to create liquidity in the form of a security, whereas they wouldn’t have that in the past.”

Meece also talked about some of the ways in which companies today are employing operating partnership units in transactions.

“Companies today are currently using operating units, which are actually limited partnership shares in a company that are convertible to common shares,” he said. “They’re used in the form of a currency to acquire real estate assets. Many of the transactions that are completed might not normally be completed because of the tax issues involved. This allows them to do it in a tax-efficient manner to the seller where the seller might normally have a low—or even negative—basis and mitigate some of the tax issues.”

Meece also reviewed some of the other uses of operating partnership units, including hedging transactions.

“One of the key issues that we’re able to do is really create a loan on the operating units to create liquidity for the owner,” Meece said. “Then, in addition to that, we have the ability to use other hedging techniques that can potentially hedge out some of the risk associated with the partnership units.”