What Is the Timeline To Convert a DST to an UPREIT?

Often, real estate investors approaching retirement face pivotal decisions about how to consolidate their assets for maximum efficiency and long-term benefits.

Converting Delaware Statutory Trusts (DSTs) to an Umbrella Partnership Real Estate Investment Trust (UPREIT) can offer a path toward diversification, passive income, and tax advantages for those with multiple properties in DSTs.

However, this process is not instantaneous; it requires strategy, preparation, and a clear understanding of the timeline involved.

Today, we will take in-depth look at the timeline for converting a DST to an UPREIT, breaking down each phase to help you determine if this transition aligns with your financial and retirement goals. Find out how you can approach new investment opportunities with this conversion today.

Understanding the Basics of DSTs and UPREITs

You must understand the foundational elements of DSTs and UPREITs to start. A DST is a legal trust structure that allows accredited investors to hold fractional shares in income-generating real estate.

Most prefer DSTs for their 1031 exchange benefits, which defer capital gains taxes when selling a property. An UPREIT, or Umbrella Partnership Real Estate Investment Trust, function differently.

Investors exchange their property holdings or DST shares for Operating Partnership Units (OPU) within a REIT. You may also see them commonly referred to as OP units. In either instance, this conversion offers new investment opportunities, such as diversification through a wider portfolio of real estate assets, liquidity options, and continued tax deferral under specific circumstances.

The transition from DST to UPREIT provides numerous benefits, but it requires an intricate process that unfolds over several stages.

Exploring the Motivations for Conversion

Many investors consider this transition to align with their long-term financial objectives. The primary motivation commonly revolves around reducing direct property management responsibilities.

With retirement imminent, the burden of tenant management and property upkeep may no longer be appealing.

Additionally, converting to an UPREIT can provide enhanced liquidity. Unlike a DST, which restricts access to capital gains until you sell the property, an UPREIT allows investors to receive distributions (similar to dividends). This cash flow can serve as a source of steady income during retirement.

A 721 DST becomes liquid after three years and has an indefinite or perpetual holding period, whereas a traditional DST is not liquid and has a holding period of five to ten years. Tax deferral also remains a compelling factor. Converting to OP units under an UPREIT can maintain the tax-deferred status of a 1031 exchange, further optimizing tax efficiency.

Beyond these practical reasons, the promise of diversification into a broader pool of real estate assets across different sectors and regions is a significant draw for those wanting to minimize risk.

Initiating the Consultation and Planning Phase

The conversion process starts with an initial consultation. During these consultations, a team of legal, financial, and real estate professionals comes together to assess your unique situation.

The consultation team carefully evaluates the investor’s portfolios to determine whether converting their DSTs into an UPREIT aligns with their retirement objectives. Advisors will also discuss long-term goals, such as desired cash flow targets or estate planning considerations.

They do not rush these consultations. Aligning all parties, clarifying goals, and determining the most appropriate path forward are critical steps that you can evaluate with an expert. This phase also serves as a foundation for ensuring that the process is as seamless as possible moving forward. You can consult the experts at Sera Capital to evaluate a Section 721 C partnership and navigate the complexities necessary to begin the consultation phase and more.

Conducting Legal and Financial Due Diligence

After the consultation, the legal and financial due diligence phase begins. This step ensures that the conversion adheres to legal, tax, and financial regulations while protecting the interests of the investor.

The consultation team carry out comprehensive reviews of the DST structure, property appraisals, and legal contracts at this time. This step is critical because it identifies potential obstacles such as existing encumbrances on the property or complex ownership structures.

Engaging experienced professionals, such as tax attorneys or CPAs, ensures compliance with necessary regulations and prevents unnecessary delays. Depending on the complexity of your investments, the consultation and legal phases can take months to get through, but when they are complete, you can delve deeper into the UPREIT agreement.

Delving Into the UPREIT Partnership Agreement

Entering the UPREIT structure requires committing to an Operating Partnership (OP) agreement. This document outlines how the appropriate parties will accurately value your contribution of assets, the rules governing liquidity options, and distribution mechanisms.

Understanding and negotiating the terms of the partnership agreement is a significant part of the timeline.

The team will carefully choose the valuation of OP units, the investor’s future rights within the REIT, and other key details. This step demands clarity and attention to detail, as it establishes the framework for the long-term relationship between you and the REIT.

Depending on negotiations, this phase usually spans several weeks. As you can see, if you ever wonder what the timeline is to convert a DST to an UPREIT, the specific duration can differ slightly depending on the specifics of your case. Another key detail to consider in this conversion process is how to analyze the tax implications and more.

Analyzing Tax Implications and Deploying Strategies

Despite the tax-deferred advantages often associated with UPREIT structures, this is another step where the specifics can vary depending on unique details, such as the portfolio and timing.

Tax advisors assess potential liabilities at this stage, such as planning around the possible sale of previously owned properties within the DST. They also recommend strategies to minimize tax exposure post-conversion. Typically, crafting these strategies runs parallel to other stages, ensuring timely execution.

Finalizing the Conversion Process and Asset Transfer

The culmination of all prior efforts leads to the final phase of converting and transferring assets into the UPREIT structure. The formal transfer of your DST interests in exchange for OP units generally involves paperwork, contract signings, and coordination with REIT representatives. This phase is relatively swift, potentially ending within weeks.

A smooth conclusion depends on the groundwork laid during the earlier phases. Once you receive your OP units, you officially become part of the UPREIT structure with access to its benefits and diversified portfolio.

Managing Assets After Conversion and Enjoying the Benefits

Post-conversion, you transition from an active asset manager to a passive investor within the REIT. Your OP units entitle you to participation in the REIT’s earnings, distributed as periodic dividends.

This setup provides you with a steady income stream while alleviating the operational burdens typically associated with direct property management. Many investors also find value in the liquidity options UPREITs provide.

The entire process of converting a DST into an UPREIT typically takes several years, depending on the complexity of the portfolio and specific steps required. While the process requires planning, diligence, and time, it can provide a pathway to unlocking significant financial and lifestyle benefits for investors nearing retirement. Take the next step today by scheduling a free consultation with the fee-only fiduciaries at Sera Capital.