REIT Qualification Requirements and UPREIT Compliance
If you’ve spent years owning property or managing real estate investments, you may have heard the term Operating Partnership Units, or simply OP Units, especially in conversations about UPREIT structures. While the concept may seem technical at first, OP Units are simply another form of equity. They help property owners transition into a professionally managed real estate portfolio without triggering taxes that normally come with selling.
This article will explains how OP Units work, why investors use them, and how they fit into long-term planning for income, flexibility, and estate simplicity.
What are OP Units?
OP Units represent ownership in the operating partnership beneath a real estate investment trust. The operating partnership is where the REIT holds its properties. Instead of receiving cash when contributing property, owners receive OP Units, which function much like equity in a private partnership. They track the REIT’s performance, provide distributions, and maintain the tax benefits tied to the contributed property.
In many modern UPREIT structures, property owners reach OP Units through a two-step process. First, they transition into a DST for income and tax efficiency. Later, if they choose, they exchange that DST interest for OP Units. This approach allows owners to leave the responsibilities of direct property ownership behind while remaining invested in high-quality commercial real estate.
How OP Units function within a UPREIT
Each OP Unit represents a proportional share in the operating partnership. As the REIT’s portfolio grows or produces income, OP Unit holders benefit in the same way shareholders do. Distributions paid to OP Unit holders are typically equivalent to the dividends paid on common REIT shares.
After meeting the required holding period, OP Unit holders usually have the option to convert their units into common shares of the REIT. This creates a path to liquidity that traditional property ownership does not provide. Owners can sell shares gradually, diversify their assets, or simply hold them for steady income.
Key advantages of OP Units
Tax deferral
When a property is sold outright, taxes are due immediately. Contributing the property in exchange for OP Units defers the capital gains and depreciation recapture taxes. This keeps more capital working for the investor and avoids the drag of a taxable sale.
Long-term participation in portfolio growth
OP Unit holders stay invested in the underlying real estate. As rents increase, assets appreciate, or the REIT makes strategic acquisitions, OP Units reflect that progress. This gives owners continued exposure to long-term value creation.
Permanent capital and reduced management burden
OP Units allow investors to move away from hands-on management, refinancing cycles, and the stress of individual property decisions. Instead, they participate in a long-term portfolio run by a professional management team that focuses on stable income and disciplined growth.
Consistent income
Because REITs distribute a large portion of their taxable income each year, OP Unit holders receive regular distributions. This can be especially valuable for investors transitioning toward passive income in retirement.
Estate planning advantages
OP Units are easy to transfer to heirs and can simplify a family’s estate. They typically receive a step-up in basis at the time of inheritance, reducing future tax exposure. Children and grandchildren inheriting OP Units avoid the complexity of managing individual real estate assets.
Liquidity through conversion
After the holding period, OP Units can generally be exchanged for REIT shares. Those shares can be sold over time, giving investors the flexibility to access liquidity when it aligns with their financial goals. This optionality is one of the main reasons many longtime property owners choose the UPREIT path.
When OP Units may be a good fit
OP Units often appeal to investors who want to defer taxes, simplify their holdings, and generate passive income. They are also attractive for those planning for heirs who may not want to manage real estate themselves. Many investors appreciate the ability to remain invested in real estate while gaining access to liquidity and a more predictable income stream.
Final thoughts
Operating Partnership Units provide a thoughtful bridge between active property ownership and a long-term, professionally managed investment structure. They combine tax deferral, income stability, and estate benefits in a way few other real estate strategies can match. For owners ready to transition out of day-to-day management or planning how their assets will serve the next generation, OP Units offer a flexible and efficient solution.
