If you've heard of the 721 exchange — converting property into REIT ownership tax-deferred — the UPREIT is the structure that makes it possible. UPREIT stands for 'umbrella partnership real estate investment trust,' and it describes a REIT that owns its properties indirectly, through an operating partnership, rather than holding them directly. This umbrella structure, with the operating partnership beneath the REIT, is what allows property owners to contribute their real estate to the partnership in exchange for units (tax-deferred under Section 721), becoming partners in the entity that owns the REIT's portfolio. The UPREIT structure emerged to let REITs acquire property using partnership units as currency — letting sellers defer tax — and it underpins the entire 721 exchange strategy. This guide explains the umbrella partnership structure, how owners join an UPREIT, OP units, and how UPREITs differ from traditional REITs.
What is an UPREIT?
An UPREIT — umbrella partnership real estate investment trust — is a REIT structured so that it owns its real estate through an operating partnership, rather than holding the properties directly. The REIT is the parent, and beneath it sits the operating partnership (the 'umbrella partnership'), which actually owns and operates the real estate. The REIT typically is the general partner and majority owner of the operating partnership, controlling it, while other parties (including property contributors) can be limited partners holding units.
This structure differs from a traditional REIT, which owns its properties directly. In an UPREIT, the layer of the operating partnership between the REIT and the properties is the key feature — it's what enables property owners to contribute property to the partnership (for units) tax-deferred. The 'umbrella' metaphor reflects the operating partnership sitting under the REIT, holding the real estate, with the REIT as the controlling entity above.
The UPREIT structure became common because it solved a problem: how could a REIT acquire property from an owner with a large embedded gain without forcing the owner to sell (and pay tax)? The answer was the operating partnership — the owner contributes property to it for units (tax-deferred under Section 721), and the REIT grows its portfolio while the contributor defers their tax. What an UPREIT is — a REIT owning its real estate through an operating partnership, with the REIT controlling the partnership above and contributors holding units — is the structural foundation of the 721 exchange. The operating-partnership layer is what enables tax-deferred property contributions. Understanding the UPREIT structure is essential to understanding how 721 exchanges work, since the UPREIT is the framework that makes them possible. The umbrella partnership is the key to the whole strategy.
The umbrella partnership structure
The umbrella partnership structure has a clear hierarchy worth understanding. At the top is the REIT — the entity that issues shares (often publicly traded) and is owned by REIT shareholders. The REIT is typically the general partner and majority owner of the operating partnership, meaning it controls the partnership and consolidates the real estate. Below the REIT is the operating partnership (OP) — the 'umbrella' — which directly owns and operates the real estate portfolio.
The operating partnership has partners: the REIT (as general partner and majority unit holder) and other limited partners, including property contributors who received OP units in 721 exchanges. So the operating partnership's ownership is split between the REIT and the unit holders (contributors). The REIT controls the OP and the real estate, while the unit holders have an economic interest (units) entitling them to distributions and convertibility to REIT shares.
This structure means the real estate is held one layer down from the REIT, in the operating partnership, with the REIT controlling it from above. The contributors hold units in the OP (not REIT shares directly), which is why their contribution is a partnership contribution (Section 721, tax-deferred) rather than a sale to the REIT. The umbrella partnership structure — the REIT above (controlling, share-issuing) and the operating partnership below (owning the real estate, with the REIT and contributors as partners) — is the architecture that enables tax-deferred 721 contributions. The operating-partnership layer, with the REIT controlling it and contributors holding units, is what makes the structure work. Understanding this hierarchy (REIT over OP over real estate) clarifies how UPREITs are organized and why property contributions to the OP are tax-deferred. The umbrella structure is the organizational basis of the 721 exchange strategy.
The UPREIT hierarchy: the REIT on top (controlling, share-issuing), the operating partnership below (owning the real estate), and contributors holding OP units — the layer that makes tax-deferred contributions possible.
How property owners join an UPREIT
Property owners join an UPREIT by contributing their property to the operating partnership in exchange for OP units — the 721 exchange. Rather than selling their property to the REIT (a taxable sale), the owner contributes it to the operating partnership, and the partnership issues OP units representing the property's value. Under Section 721, this contribution is tax-deferred, so the owner becomes a partner (unit holder) without recognizing the gain on their property.
The process involves the UPREIT agreeing to accept the owner's property (the property must fit the REIT's portfolio and criteria), valuing the property to determine the number of OP units issued, and completing the contribution. The owner goes from holding their property to holding OP units of equivalent value, now a limited partner in the operating partnership. The contributed property joins the REIT's portfolio, and the owner has diversified REIT exposure via the units.
After joining, the owner holds OP units (earning distributions, deferring the gain) and can typically convert them to REIT shares (or cash) after a holding period, triggering the tax. So joining an UPREIT via a 721 exchange transitions the owner from direct property ownership to operating-partnership unit ownership, tax-deferred, with the path to REIT shares available later. How property owners join an UPREIT — by contributing property to the operating partnership for OP units (the 721 exchange, tax-deferred under Section 721) — is the mechanism that brings owners into the UPREIT. The owner becomes a unit-holding partner in the operating partnership, with diversified REIT exposure and the deferral preserved. Understanding how owners join clarifies the practical entry into an UPREIT, which is the 721 exchange itself. Joining an UPREIT is how a property owner accesses the REIT's portfolio tax-deferred.
OP units: your stake in the partnership
OP units are the contributor's stake in the operating partnership, and understanding them is central to the UPREIT. When you contribute property to the operating partnership, you receive OP units representing your property's value — these units are your ownership interest in the partnership that holds the REIT's real estate. The units entitle you to a share of the partnership's distributions (comparable to the REIT's dividends) and represent your economic exposure to the REIT's diversified portfolio.
OP units have a special relationship with REIT shares: they're typically convertible into REIT shares (often one-for-one) after a holding period, giving unit holders a path to the REIT's traded shares (and their liquidity). This convertibility makes OP units economically similar to REIT shares (both reflect ownership in the REIT's portfolio), with the key difference being the tax treatment — holding units defers the gain, while converting to shares triggers it.
So OP units function as a tax-deferred form of REIT ownership: you hold them (earning distributions, with the gain deferred), and you can convert to REIT shares when you want liquidity (triggering the tax) or hold until death (for the step-up). The units are your bridge from contributed property to eventual REIT shares, with the deferral preserved while you hold them. OP units: your stake in the partnership — the units you receive for your contributed property, entitling you to distributions and convertible to REIT shares, functioning as tax-deferred REIT ownership — are the contributor's interest in the UPREIT. Understanding OP units (their distributions, convertibility, and tax treatment) is essential to understanding what you hold after a 721 exchange. The OP units are your ownership in the UPREIT, the tax-deferred stake that bridges your property to REIT shares.
UPREIT vs. traditional REIT
Understanding how an UPREIT differs from a traditional REIT clarifies the UPREIT's special role. A traditional REIT owns its properties directly — it buys real estate and holds it on its own balance sheet, and investors own the REIT by buying its shares. There's no operating-partnership layer, so there's no mechanism for property owners to contribute property tax-deferred; selling property to a traditional REIT would be a taxable sale.
An UPREIT, by contrast, owns its properties through the operating partnership, creating the layer that enables tax-deferred contributions. This structural difference — the operating partnership beneath the REIT — is what allows the 721 exchange. So the key distinction is that UPREITs can accept property contributions tax-deferred (via the OP and Section 721), while traditional REITs generally can't offer that (acquisitions would be taxable to the seller).
For most public investors buying REIT shares on the market, the UPREIT-vs-traditional distinction doesn't affect their investment (they own shares either way). The distinction matters specifically for property owners who want to contribute property tax-deferred — they need an UPREIT (with its operating partnership) to do a 721 exchange. So the UPREIT structure is what makes a REIT able to accept 721 contributions, which is its special relevance for property owners. UPREIT vs. traditional REIT — the UPREIT owning property through an operating partnership (enabling tax-deferred 721 contributions) versus the traditional REIT owning directly (no such mechanism) — is the distinction that matters for property owners seeking a 721 exchange. The operating-partnership layer is what gives the UPREIT its tax-deferred-contribution capability. Understanding this difference clarifies why property owners use UPREITs specifically for 721 exchanges. The UPREIT's structure is the key enabler of the 721 strategy.
- An UPREIT (umbrella partnership REIT) owns its real estate through an operating partnership, not directly.
- The structure — REIT over operating partnership over real estate — enables tax-deferred 721 property contributions.
- Owners join by contributing property to the operating partnership for OP units (tax-deferred under Section 721).
- Unlike a traditional REIT (which owns property directly), an UPREIT can accept property contributions tax-deferred.
Why UPREITs exist
UPREITs exist to solve a specific problem and serve both REITs and property owners. The original problem was that REITs wanting to acquire property from owners with large embedded gains faced an obstacle: the owner would owe substantial tax on a sale, making them reluctant to sell. This made it hard for REITs to acquire desirable properties from long-term owners sitting on big gains. The UPREIT structure solved this by letting the owner contribute property for OP units tax-deferred, so the REIT could acquire the property without forcing a taxable sale.
For REITs, the UPREIT structure provides an acquisition currency — OP units. The REIT can grow its portfolio by issuing OP units (instead of cash) to property contributors, who defer their tax. This makes the REIT's units attractive to sellers with large gains, expanding the REIT's acquisition opportunities. So the UPREIT structure helps REITs acquire property efficiently, using tax-deferred units as currency.
For property owners, the UPREIT provides the 721 exchange — a way to exit direct property into diversified, passive, more liquid REIT ownership tax-deferred, with estate-planning benefits. So the UPREIT serves owners by offering this attractive transition. The mutual benefit — REITs gaining an acquisition currency and owners gaining a tax-deferred exit — is why the UPREIT structure became widespread. Why UPREITs exist — to let REITs acquire property tax-deferred (using OP units as currency) and to let owners exit into REIT ownership tax-deferred (the 721 exchange) — explains the structure's purpose and prevalence. The UPREIT serves both sides, which is why it's a common REIT structure. Understanding why UPREITs exist illuminates the win-win that drives the 721 exchange strategy: REITs grow their portfolios, and owners get a tax-deferred path into diversified REIT ownership.
How Baker 1031 helps with UPREITs
Baker 1031 Investments helps property owners understand UPREITs and evaluate whether contributing property to one (a 721 exchange) fits their goals. We explain the umbrella structure, the OP units you'd receive, the tax deferral, and the trade-offs, and we help you assess whether transitioning from direct property into UPREIT ownership aligns with your objectives (diversification, liquidity, passivity, estate planning).
REIT units and related securities are offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), and any recommendation follows a suitability review — UPREIT contributions involve securities (OP units), so they're available to suitable investors after a review. We coordinate with your CPA on the tax aspects and help you understand the UPREIT structure and your resulting OP-unit ownership. Our role is to help you understand UPREITs and determine whether a 721 exchange into one is right for you — so if you're considering exiting direct property into diversified, passive REIT ownership tax-deferred, you understand the structure (the umbrella partnership, the OP units, the conversion to shares) and can make an informed decision. The UPREIT is the framework for the 721 exchange, and we help you navigate it.
Frequently Asked Questions
What is an UPREIT?
An umbrella partnership real estate investment trust — a REIT that owns its real estate through an operating partnership rather than directly. The REIT is the parent (controlling, share-issuing), and the operating partnership (the 'umbrella') beneath it owns the properties. This structure enables property owners to contribute property to the operating partnership for units (tax-deferred under Section 721), which a traditional REIT (owning property directly) can't offer. The UPREIT is the structure that makes 721 exchanges possible.
What does the 'umbrella partnership' refer to?
The operating partnership beneath the REIT that directly owns and operates the real estate. The REIT sits above (as general partner and majority owner, controlling the partnership), and the operating partnership — the 'umbrella' — holds the properties, with the REIT and other unit holders (including property contributors) as partners. The umbrella metaphor reflects the operating partnership sitting under the REIT, holding the real estate. This operating-partnership layer is what enables tax-deferred property contributions (721 exchanges).
How does an UPREIT differ from a traditional REIT?
A traditional REIT owns its properties directly (on its own balance sheet), with no operating-partnership layer — so it can't accept tax-deferred property contributions (selling to it would be taxable). An UPREIT owns its properties through an operating partnership, creating the layer that enables tax-deferred 721 contributions. So the key difference, relevant for property owners, is that UPREITs can accept property contributions tax-deferred (via the OP), while traditional REITs generally can't. For public investors buying shares, the distinction doesn't affect their investment.
How do I join an UPREIT?
By contributing your property to the operating partnership in exchange for OP units — the 721 exchange. Rather than selling your property to the REIT (taxable), you contribute it to the operating partnership, which issues OP units representing your property's value, tax-deferred under Section 721. You become a limited partner (unit holder) in the operating partnership, with diversified REIT exposure and the gain deferred. The UPREIT must agree to accept your property (fitting its portfolio), and the property is valued to determine your units. Joining is the 721 exchange itself.
What are OP units in an UPREIT?
Operating partnership units — your stake in the operating partnership, received for your contributed property. They represent your economic interest in the REIT's portfolio (held by the OP), entitle you to distributions (comparable to REIT dividends), and are typically convertible into REIT shares (often one-for-one) after a holding period. OP units function as tax-deferred REIT ownership: holding them defers the gain, while converting to shares triggers it. The units are your ownership in the UPREIT after a 721 exchange — your bridge from contributed property to eventual REIT shares.
Why do UPREITs exist?
To let REITs acquire property from owners with large embedded gains without forcing a taxable sale — the owner contributes property for OP units (tax-deferred under Section 721), so the REIT grows its portfolio while the owner defers tax. For REITs, OP units are an acquisition currency (attracting sellers with big gains); for owners, the UPREIT provides the 721 exchange (a tax-deferred exit into diversified REIT ownership). This mutual benefit — REITs gaining acquisition opportunities and owners gaining a tax-deferred exit — is why the UPREIT structure became widespread.
Does the REIT control the operating partnership?
Yes — the REIT is typically the general partner and majority owner of the operating partnership, controlling it and consolidating the real estate. The other partners (including property contributors holding OP units) are limited partners with economic interests but not control. So the REIT controls the OP and the real estate from above, while unit holders have a passive economic interest (distributions, convertibility to shares) without management control. This is part of the passive nature of OP-unit ownership — you own an interest but the REIT manages the portfolio.
Can any REIT accept my property in a 721 exchange?
No — only UPREITs (REITs with an operating partnership) can accept property contributions tax-deferred via Section 721, and even then, the specific UPREIT must agree to accept your property (it must fit the REIT's portfolio and criteria). A traditional REIT (owning property directly) can't offer the tax-deferred contribution. So you need an UPREIT willing to accept your particular property. Often, owners reach an UPREIT through a DST that's structured to be acquired by a REIT (a 721 exit). Finding a suitable UPREIT is part of the process.
Are OP units the same as REIT shares?
Economically similar but not identical. OP units are interests in the operating partnership (the entity owning the real estate), while REIT shares are ownership of the REIT (which controls the OP). They're typically convertible (OP units to REIT shares, often one-for-one), and both reflect ownership in the REIT's portfolio. The key difference is tax: holding OP units defers the gain, while converting to REIT shares triggers it. So OP units are the tax-deferred partnership-level interest, and REIT shares are the corporate, tradable interest you can convert into.
Is investing in an UPREIT passive?
Yes — as an OP unit holder (or REIT shareholder), your ownership is passive: the REIT manages the operating partnership and the real estate, while you hold a passive economic interest (units or shares) earning distributions. You have no management responsibilities or control over the properties. This passive nature suits owners exiting active property management, but it also means you depend on the REIT's management and decisions. The passivity is a benefit (no work) and a trade-off (no control) of UPREIT ownership.
Do public investors interact with the UPREIT structure?
Generally not directly — most public investors buy REIT shares on the market, owning the REIT (and indirectly the operating partnership) without engaging the UPREIT structure's contribution mechanism. The UPREIT structure matters specifically for property owners doing 721 exchanges (contributing property to the OP for units). So for the typical share-buying investor, the UPREIT vs. traditional distinction is largely behind the scenes; it becomes relevant when a property owner wants to contribute property tax-deferred, which requires the UPREIT's operating partnership.
How does Baker 1031 help with UPREITs?
We help you understand the UPREIT structure and evaluate whether contributing property to one (a 721 exchange) fits your goals — explaining the umbrella partnership, the OP units, the tax deferral, and the trade-offs, and coordinating with your CPA. UPREIT contributions involve securities (OP units), offered through the broker-dealer (Aurora Securities, member FINRA/SIPC) after a suitability review. We help you assess and, if appropriate, execute a 721 exchange into a suitable UPREIT, so you can make an informed decision about transitioning from direct property into diversified, passive REIT ownership tax-deferred.
Can a DST be UPREIT'd into a REIT?
Yes — many DSTs are structured with a potential UPREIT exit, where the REIT sponsoring or affiliated with the DST later acquires the DST's property and the DST investors' interests are converted into OP units via a 721 exchange. This is the common 1031-then-721 path: an investor does a 1031 into a DST, then the DST is UPREIT'd into the REIT, transitioning the investor from direct property, through the DST, into REIT ownership — all tax-deferred. Not every DST has this feature, so if a future REIT exit matters to you, confirm the DST is structured for a 721/UPREIT exit before investing.
Are publicly traded and non-traded UPREITs different?
Yes — a publicly traded UPREIT's REIT shares trade on a stock exchange, so converting your OP units to shares gives you readily liquid, market-priced shares (with market volatility). A non-traded UPREIT's shares aren't exchange-listed, so liquidity is more limited (often through periodic redemption programs at the REIT's discretion) and valuation is less transparent. Both use the operating-partnership structure enabling 721 contributions, but they differ in the liquidity and pricing of the shares you'd convert into. Consider whether you want the liquidity of a traded REIT or are comfortable with a non-traded one's limitations.
Glossary
- UPREIT
- An umbrella partnership REIT, owning real estate through an operating partnership.
- Operating Partnership (OP)
- The 'umbrella' partnership beneath the REIT that owns the real estate.
- Umbrella Structure
- The REIT-over-OP-over-real-estate hierarchy of an UPREIT.
- OP Units
- Operating partnership units held by contributors, their stake in the partnership.
- General Partner
- The controlling partner (the REIT) of the operating partnership.
- Limited Partner
- A non-controlling partner (like a contributor) holding OP units.
- 721 Exchange
- Contributing property to the OP for units, tax-deferred under Section 721.
- Section 721
- The code section deferring gain on contributing property to a partnership.
- Traditional REIT
- A REIT owning property directly, without an operating partnership.
- Acquisition Currency
- OP units used by REITs to acquire property tax-deferred.
- REIT Shares
- The corporate ownership of the REIT, convertible from OP units.
- Conversion
- Exchanging OP units for REIT shares, generally taxable.
- Distributions
- Income paid on OP units, comparable to REIT dividends.
- Contribution
- Transferring property to the OP for units, the 721 exchange transaction.
- Embedded Gain
- The deferred gain on contributed property, carried into the OP units.
- Passive Ownership
- Holding units or shares with no management role, the REIT managing.
Sources & References
- Cornell Legal Information Institute. 26 U.S. Code § 721 — Nonrecognition of gain or loss on contribution
- Nareit. What's a REIT (Real Estate Investment Trust)?
- U.S. Securities and Exchange Commission. Investor.gov — Real Estate Investment Trusts (REITs)
- Cornell Legal Information Institute. 26 U.S. Code § 856 — Definition of real estate investment trust
Disclosures
This article is published by Baker 1031 Investments, LLC for general educational purposes for accredited investors and is not an offer to sell or a solicitation of an offer to buy any security, nor is it tax, legal, accounting, or investment advice or a recommendation. Any securities offering is made solely through a sponsor’s private placement memorandum (PPM) following a suitability determination. Securities offered through Aurora Securities, Inc. (ASI), member FINRA / SIPC; Baker 1031 Investments is independent of ASI.
Oil & gas mineral and royalty interests and DST programs are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk, including possible loss of principal, commodity-price and production-decline risk, lack of control, and the risk that an intended 1031 exchange fails to qualify for tax deferral. Whether a particular interest qualifies as like-kind real property is a fact-specific legal determination that varies by state and by the terms of the instrument. Tax results depend on your individual circumstances. Consult your own CPA and attorney before acting. Past performance does not guarantee future results.
