OP Unit Liquidity Strategies for High‑Net‑Worth Investors

OP Units can provide significant advantages for investors who want tax efficiency, passive income, and a smoother transition out of active real estate ownership. But while these units offer clear benefits, accessing liquidity from them is rarely straightforward. High-net-worth investors often need strategies that balance immediate financial needs with long-term planning goals, especially when OP Units originate from appreciated real estate contributed through a DST or 721 Exchange.

This guide explains key liquidity considerations and outlines practical approaches investors can use to manage OP Units without compromising tax planning or estate objectives.

Understanding OP Units

OP Units are issued by the operating partnership of a REIT and typically received in exchange for contributing real estate interests. Many investors reach OP Units after first moving into a Delaware Statutory Trust, which provides passive income and eliminates management responsibilities before any UPREIT conversion.

OP Units behave similarly to equity in a private partnership. Holders receive distributions tied to the REIT’s performance, participate in long-term appreciation, and often have the choice to convert their units into REIT shares after a required holding period.

Liquidity Challenges to Consider

OP Units are not as liquid as publicly traded shares. Their value is tied to the operating partnership, and certain events can trigger tax consequences. Before developing a liquidity plan, investors should understand the structural limitations.

Conversion Restrictions

Many OP Units are subject to holding periods or lockups before conversion into REIT shares is permitted.

Tax Exposure

Converting units into shares is often treated as a taxable event, particularly for investors with significant appreciation from their original property contributions.

Market Factors

The value of OP Units is influenced by the underlying real estate portfolio and overall REIT performance, which can affect timing decisions for liquidity.

These factors make it important to plan ahead, especially for investors with estate or generational goals.

Liquidity Strategies for High-Net-Worth Investors

A well-planned approach can unlock liquidity while preserving the advantages that OP Units provide. Below are strategies that work for different objectives and time horizons.

Holding OP Units for a Step-Up in Basis

For investors focused on estate planning, holding OP Units until death may produce the most favorable tax outcome. Under current tax laws, heirs generally receive a step-up in basis on inherited OP Units, which can eliminate the built-in gain that existed prior to inheritance.

Key advantages

• Removes unrealized capital gains for heirs
• Simplifies future liquidity decisions for the next generation

Considerations

This strategy requires long-term planning and must align with the investor’s overall estate structure.

Staggered Conversion to REIT Shares

Instead of converting all OP Units at once, investors may choose to convert smaller portions over several years. This spreads taxable events and can help control the impact on income tax brackets.

Key advantages

• Allows more predictable tax planning
• Provides gradual liquidity to match cash flow needs

Considerations

Investors must coordinate conversions with tax advisors to avoid unexpected bracket changes or stacking of gains.

Using OP Units as Collateral

Rather than converting units or selling shares, investors can borrow against OP Units to generate liquidity. This approach maintains ownership while avoiding immediate taxable events.

Key advantages

• Retains income distributions
• Provides access to cash without triggering capital gains

Considerations

Lenders may impose conservative loan-to-value ratios, and interest costs must be evaluated within the broader financial plan.

Incorporating Charitable or Philanthropic Planning

Structured giving strategies can support personal philanthropic goals while reducing the tax impact of future liquidity events. Gifting OP Units to a charitable organization or donor-advised fund may offset gains from later conversions.

Key advantages

• Reduces tax liabilities tied to conversion
• Enables charitable planning without sacrificing financial flexibility

Considerations

This strategy requires coordination between estate planners, tax professionals, and charitable advisors.

Coordinating OP Unit Liquidity with 1031 Reinvestment

Some investors explore the option of selling OP Units and reinvesting into like-kind property through a qualified 1031 structure. While more complex and not always available, coordinated planning between OP Unit disposition and real estate reinvestment can preserve tax deferral.

Key advantages

• Maintains tax-efficient reinvestment in real estate
• Supports diversification into new property types

Considerations

Requires careful timing and detailed review to ensure compliance with 1031 requirements.

Tax Rules and Holding Period Requirements

Because OP Units originate from a contribution of appreciated assets, tax treatment is a central consideration. Investors should understand:

Holding Period Restrictions

Certain OP Units may come with mandatory lockups, delaying conversion or limiting early liquidity.

Conversion Taxation

When OP Units are converted to REIT shares, the fair market value at conversion is generally subject to capital gains tax.

Income Tax Treatment

Distributions may be treated as ordinary income or subject to specific partnership tax rules, depending on the structure of the operating partnership.

Coordinating these factors with experienced advisors is essential to preventing unintended tax consequences.

Working with Advisors

Every investor’s liquidity needs are different. Some prioritize estate simplification, while others value ongoing cash flow or strategic reinvestment. A successful OP Unit strategy integrates tax advice, estate planning, and investment goals into one cohesive plan.

Financial professionals can help:
• Evaluate liquidity needs over time
• Coordinate tax strategy with conversion schedules
• Align OP Unit decisions with generational or philanthropic goals

Thorough planning ensures that OP Units remain a powerful, flexible part of a long-term financial strategy.

Final Thoughts

OP Units offer unique opportunities for tax-efficient investing, income generation, and estate planning. With the right liquidity strategy, high-net-worth investors can unlock value from these units while maintaining control over taxes and timing. Whether the goal is generational wealth, philanthropic impact, or strategic diversification, careful planning transforms OP Units from a complex asset into a versatile financial tool.