721 UPREITs Unveiled: Dispelling Liquidity Myths in Real Estate Investing

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The phrase “liquidity” frequently appears in the context of real estate investing, particularly when the term 721 UPREITs is talked about. Converting a Delaware Statutory Trust (DST) into an UPREIT is often overpromised to investors as a tool providing immediate access to cash. However, such a belief is a misconception, and these can lead to unexpected difficulties. David and Tom Moore, Equity Advantage 1031 Exchange Bros, and industry experts Steve Mark Emerson from Equity and Robert Smith from Peregrine Private Capital cover aspects of 721 UPREITs that are often overlooked, including clarification of what liquidity really means in this situation.

What is a 721 UPREIT?

A 721 UPREIT is a practical way for property owner to liquidate their properties by receiving the shares of the Real Estate Investment Trust (REIT) instead of cash capital gains tax. This instrument is a tool for investors to rebalance their portfolios without affecting the tax deferral of their resources.

The Appeal of Liquidity

721 UPREITs are significantly attractive as liquidity is their standout feature. Typically, investors picture a situation in which they can directly cash their REIT shares without any hassle. This idea, however, is oftentimes a false impression. Although UPREITs are the road to liquidity, the fact remains that things are different from what they seem.

The Mechanics of Redemption

For example, scenario involves selling a DST property, sandy a large sum- like, $20 million- and later on, with the same property, you are a REIT. The investor will probably see this as a simple form of cash given to them. For illustration, in case the REIT is worth $1 billion and is buying several DSTs yearly, it might come to be thought of as the liquidity being at hand. But in reality, many REITs have a redemption gate, restricting cash redemptions to a small fraction, mostly, for instance, 5% of the REIT’s interest on a yearly basis.

This indicates that if a large number of DST holders opt to sell their REIT shares together, possibly, they may again confront major setbacks or restrictions. The probable liquidity that the investors are looking for could instantaneously get transformed into a waiting game, with a few investors not being able to retrieve cash in the manner they earlier envisaged.

Understanding the Redemption Gate

The redemption gate refresh is one of the prime aspects of UPREITs that carries a weight for investors to comprehend. This is set as a measure to defend the stability and integrity of the REIT. Cutting the risk of a high amount of cash that can be theoretically redeemed in a year, the REIT can successfully meet its financial obligations and keep a portfolio in equilibrium. But this will cause the case that investors would not be able to liquidate their investments that fast as they want.

Common Misconceptions About Liquidity

Although the issue of liquidity in 721 UPREITs is extremely complicated, it does not prevent a large number of investors from adhering to beliefs that can harm their decision-making processes. Here are some of these widespread errors in the form of myths:

Myth 1: UPREITs Offer Instant Cash

Several investors tend to believe that the direct transfer of their DST interests into UPREIT shares is the same as requisitioning cash with no delays. It’s not like that in reality. UPREITs provide the investors and the securities holders with another alternative route to liquidity, but it is the restrictive nature of the redemptions that can trigger the feedback loop to make the investors feel frustrated.

Myth 2: All REITs Have the Same Liquidity Terms

It is essential to note that REITs do not all function on similar liquidity conditions. Therefore, it is vital for investors to do detailed research and get to know the particular redemption policies of the REIT they are thinking to invest in. Different REITs may have their own regulations on cash redemptions, which might have a considerable effect on their investors’ capability to retrieve investments.

Myth 3: Selling REIT Shares is Easy

Another popular misperception is that it is easy to sell REIT shares, just as turning them onto the market is flipping a switch. This can be factual for publicly traded REITs, but that is not automatically implied for private or non-traded REITs. Shareholders are required to have a clear understanding of the prevailing market position and the particular investment conditions.

The Role of Professional Guidance

Given the complex nature and common misconceptions surrounding 721 UPREITs, it is essential for investors to seek the guidance of qualified professionals. Partnering with experts who possess comprehensive knowledge of investment strategies and potential returns can provide much-needed clarity and caution in navigating these intricate matters.

Why Consult Experts?

Informed Decisions: Financial professionals can help investors understand the nuances of UPREITs and guide them through the decision-making process.
Tailored Strategies: Each investor’s situation is unique. Advisors can tailor strategies that align with individual financial goals and risk tolerance.
Ongoing Support: The real estate market is dynamic. Having a trusted advisor ensures that investors remain updated on market trends and changes in regulations.

Navigating the Complexities of 721 UPREITs

Though 721 UPREITs are a great advantage for real estate investors, the idea of instant liquidity may cause misunderstandings and may cause investors to make mistakes that are costly. Therefore, it is very important to have a precise knowledge of their mechanics and limitations in the deal with such kind of investment vehicles.

If you’re considering a 721 UPREIT, it’s important to remember that while the potential for significant wealth exists, there are also challenges to navigate. To maximize your chances of success, begin by acquiring essential knowledge about the process, then consult with a qualified professional, and finally, adopt a clear and structured approach to your investments.

Disclaimer and 1031 Risk Disclosure

Disclaimer: The contents of this communication: (i) do not constitute an offer of securities or a solicitation of an offer to buy securities, (ii) offers can be made only by the confidential Private Placement Memorandum (the “PPM”) which is available upon request, (iii) do not and cannot replace the PPM and is qualified in its entirety by the PPM, and (iv) may not be relied upon in making an investment decision related to any investment offering by the issuer, or any affiliate, or partner thereof ("Issuer"). All potential investors must read the PPM and no person may invest without acknowledging receipt and complete review of the PPM. With respect to any “targeted” goals and performance levels outlined herein, these do not constitute a promise of performance, nor is there any assurance that the investment objectives of any program will be attained. All investments carry the risk of loss of some or all of the principal invested. These “targeted” factors are based upon reasonable assumptions more fully outlined in the Offering Documents/ PPM for the respective offering. Consult the PPM for investment conditions, risk factors, minimum requirements, fees and expenses and other pertinent information with respect to any investment. These investment opportunities have not been registered under the Securities Act of 1933 and are being offered pursuant to an exemption therefrom and from applicable state securities laws. All offerings are intended only for accredited investors unless otherwise specified. Past performance is no guarantee of future results. All information is subject to change. You should always consult a tax professional prior to investing. Investment offerings and investment decisions may only be made on the basis of a confidential private placement memorandum issued by Issuer, or one of its partner/issuers. Issuer does not warrant the accuracy or completeness of the information contained herein. Thank you for your cooperation.

Securities through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

There is no guarantee that any strategy will be successful or achieve investment objectives;

Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;

Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;

Potential for foreclosure – All financed real estate investments have potential for foreclosure;

Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.

Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;

Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits

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The Guys With All The Answers…

David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.