Understanding Operating Partnership Units: Rights and Benefits
If you’ve spent years owning or managing real estate, you’ve probably heard the term Operating Partnership Units, or OP Units, especially when conversations turn to REITs and UPREIT structures. They can sound technical at first, but in reality, OP Units are simply another form of equity, one designed to help property owners transition into a diversified, professionally managed portfolio without triggering a major tax bill.
Whether you’re evaluating a DST-to-UPREIT strategy or looking at ways to simplify your estate, understanding OP Units can open the door to a more flexible and tax-efficient future.
So, What Exactly Are OP Units?
OP Units represent ownership in the operating partnership that sits beneath a REIT. Think of the operating partnership as the engine room holding all the real estate assets, while the REIT sits above it as the public-facing entity.
Owners who contribute property to this partnership receive OP Units instead of cash. It’s a tax-deferred exchange, not a sale, so investors aren’t hit with capital gains taxes immediately. In many ways, OP Units function similarly to REIT shares: they track the REIT’s performance, provide income, and give you a stake in the broader portfolio.
The big difference? OP Units preserve the tax advantages tied to your original property.
How OP Units Fit Into the UPREIT Structure
Many property owners enter a UPREIT through a two-step process:
Move into a DST or similar vehicle
Elect a 721 Exchange to receive OP Units in the REIT’s operating partnership
This path clears out the hassles of property management while keeping your investment anchored to high-quality commercial real estate.
Here’s how OP Units typically behave inside a UPREIT:
Proportionate Ownership
Each OP Unit reflects your share of the operating partnership. If the portfolio grows, your value participates in that growth.
Income That Mirrors REIT Dividends
OP Unit holders usually receive distributions identical to what shareholders receive, giving you passive income without having to sell anything.
Option to Convert Units to REIT Shares
After the required holding period, you generally have the right to exchange your OP Units for common REIT shares. This provides a future source of liquidity that traditional property ownership simply can’t match.
Why Investors Value OP Units
OP Units aren’t just a clever tax tool. They address several goals that mature investors and family offices often care about: tax deferral, estate clarity, passive income, and long-term flexibility.
Here are the most meaningful advantages.
1. Significant Tax Deferral
Selling appreciated real estate can create large capital gains and depreciation recapture taxes.
A contribution into an UPREIT, receiving OP Units instead of cash, defers those taxes completely.
The deferral continues:
through the DST phase
through the UPREIT exchange
and even into future OP Unit ownership
For many, this alone justifies the strategy.
2. Participation in Long-Term Portfolio Upside
Rather than taking a fixed sale price and walking away, OP Unit holders remain tied to the REIT’s real estate portfolio. If rents rise, properties appreciate, or acquisitions strengthen the portfolio, OP Units capture that value.
This keeps your wealth working instead of freezing it at the moment of sale.
3. Access to Permanent, Institutional-Grade Capital
One of the lesser-known advantages of OP Units is the shift from deal-by-deal capital raising to permanent capital. You’re no longer hunting for your next property, managing tenants, or worrying about refinancing cycles.
Your investment becomes part of a long-term program overseen by a professional team.
4. Passive Income Through REIT Distributions
REITs must distribute at least 90% of their taxable income each year.
OP Unit holders benefit from this requirement the same way shareholders do, via consistent distributions.
For many retired owners, this income consistency is the most attractive feature.
5. Estate Planning Made Far Easier
OP Units are simple to inherit and far easier for children to manage than a portfolio of properties spread across different states.
They also typically receive:
A step-up in basis at inheritance
Clean transfer mechanics
Straightforward valuation
Many families choose OP Units specifically because they make the transition to the next generation smoother.
6. Built-In Liquidity Optionality
Once the holding period expires, OP Unit owners generally have the option to convert their units into common REIT shares. Those shares can then be sold when it suits your financial plan.
You’re no longer locked into illiquid real estate or forced to sell a property all at once.
How OP Units Support Investor Goals
When you look at OP Units through the lens of investor objectives, their appeal becomes clear:
Tax-efficient transition out of active management
Diversification into a larger, more stable portfolio
Monthly or quarterly passive income
Control over liquidity timing
A simpler estate for heirs
For many long-time property owners, OP Units check every box.
Is Exchanging Property for OP Units the Right Move?
It depends on your priorities. You may be a strong candidate if you:
Want to eliminate the tax burden of selling
Are tired of active property management
Prefer stable, passive income
Are planning for heirs who don’t want to manage real estate
Value liquidity and optionality in the future
The most successful transitions happen with sponsors who understand both sides of the equation, the real estate you’re contributing and the long-term structure of the UPREIT.
Final Thoughts
OP Units offer a unique bridge between the world of hands-on real estate ownership and the world of diversified, professionally managed portfolios. By combining tax deferral, income stability, and estate simplicity, they allow investors to step into a new phase of wealth management without walking away from the value they’ve built over the years.
For many, OP Units aren’t just an investment choice, they’re a strategy for long-term stability, flexibility, and generational planning.
