Is An UPREIT Transaction The Right Strategy For Today’s Multifamily Owners?

When the dust settled from the initial disruption caused by the pandemic, it was clear that two commercial real estate asset classes came out on top: multifamilyand industrial. Industrial saw gains thanks to the surge of e-commerce activity, and multifamily rents continued to rise in 2020 and soar even higher in 2021.

CBRE predicted that 2022 will be a record-breaking year for multifamily investment volume. Although many owners may be looking to strike while the iron is hot and sell their properties now, they should consider alternative strategies before committing to a cash deal. 

“Multifamily had a historical run in 2021, owners saw their valuations rise and now there are very motivated sellers, but that doesn’t mean that a cash sale is always the best option,” Bonaventure CEO Dwight Dunton said.

Founded in 1999, Bonaventure is a vertically integrated real estate private equity firm, specializing in the development, investment, construction and management of multifamily communities across the mid-Atlantic and Southeast. Bonaventure offers a variety of private investment strategies.

The firm operates an Umbrella Partnership Real Estate Investment Trust, or UPREIT, which is a real estate investment trust that’s inorganic growth stems primarily from 721 exchanges. In a 721 exchange, real estate owners contribute their property to an operating real estate partnership, or OP. In exchange, they gain interest in that partnership, while deferring taxes on the sale — no tax is due on the contribution or receipt. These owners can then take a loan on their new equity stake in the REIT for immediate tax-exempt liquidity.

REITs often use OP exchanges — usually through OPs with a large number of properties — to scale their portfolios in a tax-friendly way. Along with deferring capital gains taxes, property owners who exchange real estate for OP units gain interest in a larger, more diversified portfolio, and eventually, they can convert their units into shares of an UPREIT to gain liquidity. 

Dunton said that since Bonaventure is vertically integrated, the firm is able to conduct advanced due diligence, improving returns for investors, often sourcing off-market deals. The acquisitions team targets newer, Class-A, stabilized multifamily properties valued between $30M and $100M in the mid-Atlantic and Southeast. 

He further explained why the firm is effective at conducting 721 exchanges. 

“While this option is available to all, only certain types or sizes of firms can truly take advantage of this tool,” Dunton said. “If a manager has too many assets under management, they don’t have time to negotiate these complex deals one-by-one like Bonaventure and our dedicated acquisitions team. If a manager is too small they are limited in the size or quantity of deals they can do, which may make complex efforts like the 721 not quite worth it.”

Dunton said that while some of the largest multifamily market-share companies have to make deals that may not always be the right choice for their investors in order to put their capital to work, Bonaventure’s private structures allow it to say “no” when the deal is not right for its strategy. 





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