1031-721 Exchange How Does It Work?

1031-721 How Does It Work?

Step #1

•           The investor sells the Relinquished Property to a third-party buyer.

•           The sales proceeds are deposited into an account held by a QI.

Step #2

•           The investor purchases a Replacement Property from a REIT.

•           The QI uses the proceeds from the sale of the Relinquished Property held to acquire the Replacement Property.

Step #3

•           The investor leases the Replacement Property back to an Operating Partnership (OP) (structured either as an UPREIT or DOWNREIT), whose portfolio of properties is managed by the REIT the Replacement Property was purchased from.

-The OP is a separate entity from the REIT, and its ownership is divided into OP units.

-Through the provisions of a “call” option, the OP is afforded the right, but not the obligation, to acquire the Replacement Property from the investor for a fixed purchase price. Or, alternatively, the investor can have a “put” option to sell the Replacement Property to the REIT

Step #4

•           If the UPREIT or DOWNREIT exercises the “call” or the investor exercise the “put”:

-The investor will transfer the Replacement Property to the UPREIT or DOWNREIT in exchange for OP Units.

-OP Units are the substantial economic equivalent of the REIT's common shares, and are convertible into the REIT's common shares on a one-for-one basis.

-Because there is a possibility that the “call” will not be exercised, the investor must acquire the Replacement Property knowing he will be holding the Replacement Property for investment purposes and may not ultimately receive OP Units.

Once an investor receives OP Units, how can he or she redeem those units?

•           The OP has the right to redeem investors for either cash or REIT common stock.

-TAXABLE EVENT: The receipt of cash or REIT common stock in exchange for OP Units brings an end to an investor’s tax deferral.

-Assuming an investor receives REIT common stock, the investor may liquidate such stock (prior to its listing) pursuant to the REIT's redemption program.

Comments

[Phillip McHugh]

I think this information is so 'f'ing interesting- no joke. Do you think the 1031-721-REIT aspect will grow? I hope it becomes a new tool in the box for 1031 users- it would really benifit the end user