Real Estate Roll Ups

Mixed Motives

With public stock valuations moving ever upward, the managers of several private real estate partnerships have sought permission from their clients to "roll up" their partnerships' assets into publicly traded Real Estate Investment Trusts (REITs). Their motives appear mixed, at best. To be sure, clients benefit from improved liquidity, minute-to-minute valuations (as if these matter for real estate), and sanitization of unrelated business income. (Like mutual funds, REITs serve as a firewall between their holders and what would otherwise be UBIT.) Managers in turn benefit from a semi-captive asset base (i.e., reduced marketing headaches), a more stable income stream, and favorable tax treatment on gains derived by converting their contractual right to partnership fees into a capital asset. From a client's perspective, the latter feature is outrageous on its face, causing many institutions to reject summarily any and all roll up proposals, excepting perhaps the occasional "self-administered REIT." The latter structure has the virtue of giving institutional owners a fighting chance to grab parts of cash flows that they seldom receive from conventional REITs (e.g., leasing and property management fees).