October 09, 2014
Article by Kurt Koegl, Tax & Business Services Senior Manager, "The REIT Roll-Up: Unlocking Potential of Real Estate Assets," Featured in Real Estate Weekly
By Kurt Koegl, Tax & Business Services Senior Manager
2013 saw 19 REIT IPOs raising $5.7 billion in capital, including the high-publicity Empire State Building IPO, which raised $930 million.
How did the Empire State Building REIT (Empire State Realty Trust; NYSE Ticker: ESRT) get to market?
It did so through the use of a "roll-up" including the landmark namesake building and a portfolio of New York properties owned by the Malkin family.
A REIT rollup gives real estate owners liquidity, preserves the tax basis of existing investors that do not want to cash out of their current investment and provides the opportunity for the REIT to obtain funds from the capital market.
It will create a perpetual platform, provide diversification, the ability to cross collateralize properties for better access to debt at lower rates and the opportunity to access the capital markets directly in a tax efficient manner.
A REIT rollup ends with a typical UP-REIT structure wherein a public REIT owns the majority interest in an operating partnership ("OP") which, in turn, owns real estate investments.
The REIT acquires ownership in the partnership through the roll up process.
The starting point for a rollup is one or more partnerships owning real estate. Partnership shares are inherently illiquid. They are hard to buy and sell.
Additionally, partners can have negative tax capital accounts as a result of receiving depreciation deductions and cash distributions over the years. A sale of these negative capital account interests or of the underlying property itself can trigger significant tax gains to the partners.
In a rollup, the partners in each of the property owning partnerships contribute or merger their partnership interests into the OP in exchange for shares in the OP.
Their tax basis is preserved as a partnership contribution is a tax free exchange.