Frequently Asked Questions

A 1031 exchange, also known as a like-kind exchange, is a tax-deferred exchange under Section 1031 of the Code that generally allows a seller of investment real estate to defer federal and state capital gains taxes by using the proceeds from the sale of their original property (the “Relinquished Property”) to acquire another investment property or properties (the “Replacement Property”). 

The primary benefit of completing a 1031 exchange is the ability to defer capital gains taxes on the sale of real estate and therefore reinvest 100% of the sale proceeds into another real estate investment.

To be eligible for a 1031 exchange, both the Relinquished Property and the Replacement Property must be held for productive use in a trade or business or for investment purposes. For example, an office building and a rental condominium would both be eligible for a 1031 exchange upon sale. A second home owned exclusively for personal use would not be eligible for a 1031 exchange upon sale, as it would not meet the requirement of being held for productive use in a trade or business or for investment purposes.

Luckily for investors, the rules regarding what’s considered “like-kind” for 1031 exchange purposes are quite broad. A self-storage facility can be exchanged for an office building. Farmland can be exchanged for an apartment building. All that matters is that both the Relinquished Property and the Replacement Property constitute real estate held for productive use in a trade or business or for investment purposes.

Most 1031 exchanges take the form of “deferred exchanges,” meaning that there is a gap in time between the sale of the Relinquished Property and the purchase of the Replacement Property (i.e., the two transactions do not occur simultaneously). However, if the seller of the Relinquished Property has the right to receive, control, or use the proceeds from the sale of the Relinquished Property before the 1031 exchange is completed (which is referred to by the IRS as “constructive receipt”), then the exchange will not qualify for tax-deferred treatment under Section 1031 of the Code.

To avoid “constructive receipt,” the seller engages a third-party known as a qualified intermediary (“QI”). The role of the QI is to act as an independent intermediary between the buyer and the seller of the properties involved in the 1031 exchange. The QI holds the funds from the sale of the Relinquished Property and uses those funds to purchase the Replacement Property. This process ensures that the seller of the Relinquished Property does not take constructive receipt of the sale proceeds and thus avoids triggering a taxable event.

From a real estate seller’s perspective, the steps of a typical 1031 exchange are generally as follows:

1. Enter into Contract to Sell the Relinquished Property – Ideally, this contract contains provisions making it clear to the buyer that the seller intends to execute a 1031 exchange.
2. Engage a Qualified Intermediary – Once the QI is formally engaged, the seller and the QI will enter into an exchange agreement and the sales contract will be assigned to the QI.
3. Close on Sale of the Relinquished Property – Upon the close of the sale of the Relinquished Property, outstanding mortgage debt secured by the Relinquished Property is repaid and any remaining sale proceeds are transferred directly to the QI to be held in escrow until the Replacement Property is acquired.
4. Identify Potential Replacement Properties – The seller has 45 days from the sale of the Relinquished Property to identify potential Replacement Properties. The QI will assist the seller with this process.  The seller is permitted to identify up to three properties without regard to the fair market value of the properties (the “Three Property Rule”) or more than three properties with a total fair market value not in excess of 200% of the value of the Relinquished Property (the “200% Rule”). There are other ways to identify potential Replacement Properties, but the Three Property Rule and the 200% Rule are the most common.
5. Enter into Contract to Acquire the Replacement Property (or Properties) – Like with the initial sale contract, this contract will be assigned to the QI. Please note that the Relinquished Property can be exchanged for one or more Replacement Properties (or interests therein as further described below).
6. Close on the Replacement Property Acquisition – The Relinquished Property seller will instruct the QI to wire funds for closing to the Replacement Property seller(s) or their escrow agent, as applicable. To enjoy the tax-deferral benefits of a 1031 exchange, all Replacement Property acquisitions must close within 180 days of the sale of the Relinquished Property.
7. Report the 1031 Exchange to the IRS – This is done by filing Form 8824 with your tax return for the year in which the 1031 exchange occurred.

In order to maximize tax deferral in a 1031 exchange, the purchase price of the Replacement Property (or Properties) must be, in aggregate, at least as much as the sale price of the Relinquished Property.

In a 1031 exchange, if mortgage debt is repaid as part of the sale of a Relinquished Property, the amount of debt paid off using sale proceeds is considered “boot” which is subject to taxation and could reduce the amount of the seller’s tax deferral. For example, let’s say someone sells a Relinquished Property for $500,000 with a mortgage balance of $200,000. If the mortgage debt is paid off as part of the sale and the amount of the debt is not properly replaced, the seller will receive $200,000 of “boot.” To remedy this situation and maintain full tax deferral as part of his or her 1031 exchange, the seller must acquire $500,000 of Replacement Properties. This means the seller must either (i) contribute an additional $200,000 of cash so that, when combined with the $300,000 of net equity proceeds from the sale of the Relinquished Property, the seller is able to acquire $500,000 of Replacement Properties, or (ii) take on $200,000 of new debt as part of the acquisition of his or her Replacement Properties.

A Delaware Statutory Trust, or DST, is an investment vehicle that can provide an individual investor access to commercial real estate that may be too large for the investor to acquire on its own. The DST accomplishes this by allowing commercial real estate to be fractionalized, giving investors the opportunity to acquire a percentage interest in the DST and, as a result, in the real estate that the DST owns.

In 2004, the IRS issued Revenue Ruling 2004-86 concerning the tax treatment of a DST for purposes of 1031 exchanges. The ruling specified that if a DST met certain requirements, including the following seven (referred to as the “Seven Deadly Sins”), beneficial interests in the DST could be utilized as Replacement Property in a 1031 exchange.

1. Once the DST’s initial offering is closed, there can be no future contributions to the DST by either current or new investors.
2. The trustee of the DST cannot renegotiate the terms of existing loans, nor can it borrow new funds from any party, unless a loan default exists or is imminent due to a tenant bankruptcy or insolvency.
3. The trustee of the DST cannot reinvest the proceeds from a sale of real estate.
4. Any reserves or cash held between distribution dates can only be invested in short-term obligations.
5. All cash, other than necessary reserves, must be distributed on a regular basis.
6. The trustee of the DST is limited to making capital expenditures with respect to the DST’s property to those for (i) normal repair and maintenance, (ii) minor non-structural capital improvements, and (iii) those required by law.
7. The trustee of the DST cannot enter into new leases or renegotiate the current leases unless there is a tenant bankruptcy.

The DST structure has been widely adopted because it provides numerous advantages for 1031 exchange investors relative to other forms of Replacement Property ownership, including: (1) the ability to right-size the investment to more precisely match the size of the Replacement Property to that of the Relinquished Property, (2) the ability for investors to gain access to large commercial properties or even pools of properties, (3) potentially lower transaction and administrative costs, and (4) where applicable, potentially more favorable financing terms.

Prior to the global financial crisis, the tenancy-in-common (“TIC”) structure was the most commonly used approach for fractionalizing commercial real estate for syndicated 1031 exchange offerings. However, the global financial crisis revealed some of the shortcomings of the TIC structure, including management complexity, unanimous consent requirements and the potentially conflicting interests of the multiple tenancy-in-common owners. This made loan workouts and other difficult decisions resulting from the global financial crisis harder to process. Since then, the DST structure has taken hold as the preferred approach in the syndicated 1031 exchange space for numerous reasons, including but not limited to the following:

• Single Entity: A DST is a single legal entity, while a TIC is made up of multiple owners who each hold a separate interest in the property. As a result, lenders may find it easier to work with a single entity rather than multiple owners with potentially conflicting interests.
• Limited Liability: In a DST, the individual investors have limited liability protection, which means that they are not personally liable for the debts or obligations of the DST. This can provide lenders with greater security in the event of default or other issues.
• Uniformity: DSTs typically have a standardized operating agreement that is consistent across all investors, which can make it easier for lenders to understand and evaluate the investment.
• Trustee: A DST is required to have a trustee who is responsible for managing the trust, overseeing the operations of the property, and making decisions related to the property such as if and when to sell. This can provide lenders with an additional layer of oversight and protection.
• Size and Scale: TICs are generally limited to 35 co-owners, whereas a DST can have as many as 1,999 beneficial owners. This can allow DST offerings to be significantly larger with potentially lower investment minimums than those of TIC offerings, and can even allow the DST to own multiple properties on behalf of its investors.

A real estate investment trust, or REIT, is an investment vehicle that owns and operates income-producing real estate and other real estate-related investments on behalf of its investors. In general, a REIT is a company that:

• pays dividends to investors of at least 90% of its annual REIT taxable income, computed without regard to the dividends-paid deduction and its net capital gain;
• is not subject to the U.S. federal “double taxation” treatment of income that results from investments in a corporation because a REIT is not generally subject to U.S. federal corporate income taxes on its net income that it distributes to its shareholders, provided certain requirements are satisfied;
• combines the capital of many investors to acquire or provide financing for real estate properties; and
• offers the benefit of a diversified real estate portfolio under professional management.

A net asset value REIT, commonly referred to as a “NAV REIT,” is a type of REIT that generally exhibits some or all of the following characteristics:

• “Non-traded,” meaning that the REIT’s shares are not listed on a public securities exchange;
• Perpetual-life entity not intending to seek any sort of future listing, sale or other form of liquidity event;
• Recalculates its NAV per share and NAV per OP Unit for all classes of REIT shares and OP Units on a periodic basis (generally monthly);
• Generally sells and redeems shares and OP Units on a periodic basis (generally monthly) at their most recently calculated NAV per share and NAV per OP Unit;
• Is externally advised, meaning that the REIT’s management team and employees reside in a separate entity referred to as the Advisor that receives fees and expense reimbursements from the REIT.

One of the key advantages of NAV REITs is that they generally exhibit less price volatility than publicly-traded REITs. This is because publicly-traded REITs’ securities are priced by the trading market which is influenced by numerous factors, not all of which are related to the underlying value of the REIT’s real estate assets and liabilities. NAV REITs’ utilization of net asset value-based pricing (with real estate values generally determined using a third-party appraisal process) eliminates the impact of public securities market sentiment and other ancillary factors, generally leading to reduced pricing volatility relative to that exhibited by publicly-traded REITs.

Section 721(a) of the Code generally provides that neither a contributing partner nor a recipient partnership will recognize gain or loss for U.S. federal income tax purposes upon a contribution of property to the partnership in exchange for an equivalent-value partnership interest therein. Such a tax-deferred contribution of property to a partnership in exchange for an interest in the partnership is sometimes referred to as a 721 exchange.

UPREIT stands for “Umbrella Partnership Real Estate Investment Trust.” An UPREIT is a type of REIT that holds all or substantially all of its investments through a subsidiary limited partnership referred to as its Operating Partnership in which the REIT acts as general partner. Many large REITs operate as UPREITs, and they use this structure because a sale or contribution of property directly to a REIT is generally a taxable transaction to the selling property owner. However, a seller who desires to defer the recognition of taxable gain on the sale of its property may transfer the property to the REIT’s Operating Partnership for partnership interests referred to as “OP Units” and, under Section 721 of the Code, defer the taxation of the gain generally until the seller later redeems its OP Units for cash or, at the discretion of the REIT, for REIT shares. Using an UPREIT structure gives the REIT an advantage in acquiring desired properties from persons who may not otherwise sell their properties because of unfavorable tax results.

Operating Partnership Units, or “OP Units” as they are more commonly called, are partnership interests in a REIT’s Operating Partnership. Each OP Unit is intended to be the substantial economic equivalent of one share of the corresponding class of the REIT’s common stock. This means that each OP Unit will have the same NAV and will be paid the same gross ongoing distributions as a corresponding share of the REIT’s common stock of the same class. Also, just as a REIT can have different share classes with differing distribution-related and other fees, the REIT’s Operating Partnership can have different classes of OP Units for the same reasons. However, OP Units are a different investment than common shares in many respects, including tax treatment, voting rights and redemption rights.

UPREIT transactions (i.e., 721 exchanges of real property with a REIT’s Operating Partnership in exchange for OP Units) are generally less complex and can be easier to execute than 1031 exchanges. This is because many of the requirements of a 1031 exchange such as the need for a QI, the need to identify Replacement Properties within 45 days, the need to acquire Replacement Properties within 180 days, etc., are not applicable to 721 exchanges.

However, the biggest impediment to an individual investor completing a 721 exchange is that the REIT’s Operating Partnership must first want to acquire that investor’s property. Given that most REITs generally focus on acquiring large commercial properties, the likelihood that an individual investor will own a property that a REIT wants to acquire is extremely limited. This is why most individual investors focus on 1031 exchanges as opposed to 721 exchanges as their primary tax-deferral strategy. 

A 1031 UPREIT Program is a syndicated DST program designed for 1031 exchange investors that can potentially allow them to go from owning an active investment in real property to owning a passive interest in the overall portfolio of a REIT, all on a tax-deferred basis. This can be accomplished by combining the benefits of a 1031 exchange with those of an UPREIT transaction as further described below.

Yes, there are two general types of 1031 UPREIT Programs. The differences between the two come down to the structure of a key component of the 1031 UPREIT Program, the fair market value purchase option (the “FMV Purchase Option”). The FMV Purchase Option gives the REIT’s Operating Partnership the right, but not the obligation, to acquire the beneficial interests in the DST from all investors in exchange for OP Units in a tax-deferred UPREIT transaction or for cash. The two different types of 1031 UPREIT Programs structure their FMV Purchase Options differently, as further described below:

1. Mandatory 1031 UPREIT Program – In this type of program, the FMV Purchase Option is generally exercisable earlier (i.e., beginning two years after the close of the DST syndication period), and the REIT (as opposed to the DST investors) gets to choose whether investors receive OP Units or cash. Because the purpose of the program is to raise equity capital for the REIT, DST investors should expect to receive OP Units in virtually all cases where the FMV Purchase Option is exercised. Finally, the REIT (through a subsidiary) is the sponsor of the program, and DST investors are provided information and given the opportunity to diligence the REIT prior to making their DST investment since, if the FMV Purchase Option is exercised, they will not have the opportunity to elect to receive cash.
2. Optional 1031 UPREIT Program – In this type of program, the FMV Purchase Option is often exercisable later (i.e., between 5 and 10 years from the close of the DST syndication period), and investors get to choose whether to receive OP Units or cash at the time the FMV Purchase Option is exercised. The REIT may not be the sponsor of the program, and the Operating Partnership in which investors can receive OP Units may not be known until the time the FMV Purchase Option is exercised. As such, the REIT/Operating Partnership must be diligenced at the time the FMV Purchase Option is exercised as part of the investor’s decision whether to receive OP Units or cash.

Osage Exchange’s principals were part of the team that helped structure the original mandatory 1031 UPREIT Program, and Osage Exchange continues to assist real estate sponsors in establishing, structuring and administering mandatory 1031 UPREIT Programs as a way to raise equity capital for their REITs.

The steps of a typical 1031 UPREIT transaction are generally as follows:

1. The 1031 UPREIT Program launches an offering of beneficial interests in a DST that owns, directly or indirectly, one or more real properties sourced from a REIT’s real estate portfolio or acquisition pipeline.
2. An investor begins the process of executing a 1031 exchange as described in steps 1 – 3 under “What is the typical process for completing a 1031 exchange?” above.
3. The investor and his or her advisor diligence the 1031 UPREIT offering and, after deciding to move forward, work with the QI to properly identify the real properties owned by the DST in the 1031 UPREIT offering.
4. The investor and his or her advisor complete and submit the 1031 UPREIT Program subscription documents.
5. The subscription documents are reviewed and approved by 1031 UPREIT Program personnel, following which the investor is provided funding instructions; the investor works with his or her QI to fund the amounts required to purchase beneficial interests in the 1031 UPREIT Program’s DST.
6. The investor’s purchase of DST beneficial interests closes and the investor receives a confirmation statement confirming his or her purchase.
7. As an owner of DST beneficial interests, the investor receives his or her pro rata portion of ongoing cash distributions made by the DST.
8. On an annual basis, the investor receives tax reporting information from the DST in the form of a “substitute 1099” that outlines the investor’s pro rata portion of DST revenues and expenses. The investor and his or her tax preparer use this and other information to make any required Federal and state tax filings.
9. In accordance with the terms of the DST Trust Agreement and/or other transaction documentation, the Operating Partnership of the REIT will evaluate and may choose to exercise the FMV Purchase Option. Please note that the investor has no control over whether or not the FMV Purchase Option will be exercised, and there is no guarantee that the Operating Partnership will choose to exercise it. If the FMV Purchase Option is not exercised, the investor will continue to own his or her beneficial interest in the DST until the property or properties owned by the DST are sold and the net sales proceeds are distributed to investors.
10. Assuming the FMV Purchase Option is exercised and the investor receives OP Units, the investor will receive monthly or quarterly distributions from the Operating Partnership. From a tax perspective, each year the investor will receive a Federal K-1 as well as a K-1 for certain states in which the Operating Partnership owns property.
11. After holding OP Units for one year, the investor can generally request redemption of his or her OP Units for cash or, at the REIT’s election, for shares of REIT common stock. The redemption of OP Units, whether for cash or for REIT shares, is a taxable event.

1031 UPREIT Programs are unique in that they can provide substantial benefits to all parties involved. 

Investor Benefits 

• Provides a passive and readily available Replacement Property solution to complete a 1031 exchange and defer capital gains with potential access to a large, diversified portfolio of real estate. 
• Provides significant estate planning benefits including easy divisibility of the estate among heirs and the ability for heirs to enjoy a step-up in basis upon the decedent’s death. 
• Assuming the FMV Purchase Option is exercised, provides access to liquidity, in part or in whole, through the Operating Partnership’s OP Unit redemption program. 

Distribution Partner Benefits 

• Provides advisors with a sophisticated 1031 exchange solution that adds significant tangible value for their clients. 
• Allows advisors to grow their billable AUM by converting clients’ private real estate holdings into DST interests and, if the FMV Purchase Option is exercised, into securities in the form of OP Units. 

REIT Benefits 

• Provides access to equity capital to grow the REIT’s portfolio and AUM. 
• Tax-sensitive investors tend to be long-term investors. 
• 1031 UPREIT Programs are highly valued by distribution partners, potentially leading to new and better relationships that can help pave the way for REIT common stock selling agreements. 

Initially, 1031 UPREIT Program offerings and traditional DST offerings are very similar. Both sell beneficial interests in a DST that holds one or more real properties to investors seeking to complete 1031 exchanges of real estate. Operationally, both make ongoing cash flow distributions and provide annual tax reporting statements to investors. The key differentiator between a 1031 UPREIT Program offering and a traditional DST offering is provided by the FMV Purchase Option. If this option is exercised, several benefits available only to 1031 UPREIT Program participants can be realized, including but not limited to:

• Ongoing Liquidity – Traditional DST offerings do not provide access to ongoing liquidity. Instead, investors only have access to liquidity if and when the manager of the DST elects to sell the property or properties that the DST owns. OP Units received through the exercise of an FMV Purchase Option, however, can be liquidated in whole or in increments at the investor’s discretion through the Operating Partnership’s OP Unit redemption program beginning one year after the OP Units are received.
• Estate Planning Benefits – While beneficial interests in a traditional DST offering can be divided among heirs, OP Units received through the exercise of an FMV Purchase Option can be easier to divvy up given their relatively lower dollar denomination per Unit. More importantly, heirs can make independent decisions with respect their OP Units upon receipt since they are able to be liquidated through the Operating Partnership’s OP Unit redemption program.
• Long-Term Tax-Deferral – Because most 1031 UPREIT Programs are sponsored by NAV REITs which are perpetual-life entities, investors can hold OP Units for as long as they would like and generally maintain their tax-deferral unless and until they choose to redeem their OP Units. With traditional DST programs, investors only maintain their tax-deferral until the DST manager chooses to sell the DST’s properties, which generally happens 5 – 10 years after the DST offering closes. At that point, investors either pay their capital gains taxes or 1031 exchange into another DST / Replacement Property and once again pay all of the associated upfront fees and expenses.

Another differentiator between 1031 UPREIT Programs and traditional DST programs has to do with the motivations of the sponsor in each case and the impact that has on overall fees. With traditional DST programs, the sponsor has no long-term tie to the assets. As such, the sponsor is motivated to treat its DST offerings as highly transactional, often looking to make as much money from fees as the market will allow. In a 1031 UPREIT Program, fees and expenses are generally lower, as the sponsor’s primary motivation is to raise REIT equity capital.

Finally, the master lease structure utilized by many 1031 UPREIT Programs can be more investor-friendly than the master leases used by typical DST programs. Many 1031 UPREIT Program master leases are long-term (generally 10 – 20 years), fixed rate (reducing exposure to things like underlying property vacancy), and are often fully guaranteed by a substantive entity (i.e., the REIT’s Operating Partnership).

Properties used in many 1031 UPREIT Programs (and, in particular, most mandatory 1031 UPREIT Programs) are generally chosen either from the sponsoring REIT’s existing real estate portfolio or from its investment pipeline. These properties must meet certain criteria related to DST qualification, projected income and total return potential, tax implications to the REIT and other factors. In all cases, the properties are selected and underwritten by the REIT’s investment team independent of the 1031 UPREIT Program and are designated for potential long-term hold by the REIT. This is important because for any given 1031 UPREIT offering, while there can never be a guarantee that the FMV Purchase Option will be exercised, selecting properties that the REIT’s investment team views as potential long-term holds increases the probability that it will be.

Prior to the launch of a mandatory 1031 UPREIT offering, the DST and a wholly-owned subsidiary of the REIT’s Operating Partnership referred to as the Master Tenant enter into a long-term triple-net master lease of the DST’s properties (the “Master Lease”) with the DST as owner and lessor and the Master Tenant as lessee. The DST earns income from the properties pursuant to a fixed payment schedule as outlined in the Master Lease and payable by the Master Tenant. Further, the Master Tenant sub-leases the properties to their end tenants and has full responsibility with respect to the properties, including but not limited to managing, leasing, operating and maintaining the properties. In this way, the Master Tenant takes on a significant portion of the ongoing operational risks associated with the properties during the term of the Master Lease.

The Master Tenant in most mandatory 1031 UPREIT offerings is a special purpose entity wholly-owned by the REIT’s Operating Partnership, and it is generally not expected to have any substantial assets. For this reason, the financial and other obligations of the Master Tenant under each Master Lease are fully guaranteed by the REIT’s Operating Partnership pursuant to a guaranty agreement (the “Guaranty”). For this reason, the credit underlying each Master Lease is that of the Operating Partnership as a whole and not just that of the Master Tenant, which is a significant benefit to investors.

The combination of the Master Lease and the Guaranty provide a number of benefits to 1031 UPREIT Program investors, including but not limited to the following:

• Protects the DST from running afoul of the “Seven Deadly Sins” outlined in IRS Revenue Ruling 2004-86.
• Eliminates certain property-level costs by making them the responsibility of the Master Tenant.
• Eases the burden of property management, including maintaining the DST’s properties and re-leasing the properties when existing leases expire, by making these and other things the responsibility of the Master Tenant.
• Credit enhances the cash flow stream received from the DST by having a large, creditworthy entity (the REIT’s Operating Partnership) guaranty the Master Tenant’s payment and other obligations under the Master Lease.
• May reduce volatility in the value of the DST’s properties due to the long-term, fixed-rate triple-net nature of the Master Lease.

Each 1031 UPREIT Program DST will be managed by a separate entity, referred to as the manager, which is often an affiliate of the REIT’s external advisor. The manager will also serve as the signatory trustee of each DST. The manager’s responsibilities with respect to any given 1031 UPREIT Program DST will be outlined in that DST’s Trust Agreement, and will generally include but are not limited to (i) collecting rents and making distributions, (ii) entering into agreements to sell interests in the DST to investors, (iii) complying with the terms of any financing documents, (iv) notifying the relevant parties in any event of default, (v) determining if and when to make a transfer distribution, and (vi) determining if and when to sell the properties owned by the DST.

Each investor will receive, on an ongoing basis, its pro rata allocation of available cash from the DST in which it owns an interest. The amount of available cash to be distributed by the DST will be determined by the manager. During the term of the Master Lease, available cash will generally consist of Master Lease rental payments less certain fees, expenses, debt service (if applicable) and reserves.

No, an investor should not plan to have access to liquidity while owning DST interests.

A transfer distribution occurs in the event that the manager determines the Master Tenant is insolvent or has defaulted in paying rent, or in certain other circumstances, and the manager further determines to address such risks by transferring title to the property or properties held by a given DST to a Springing LLC, a newly formed Delaware limited liability company, and terminating the applicable DST. If a DST is terminated pursuant to a transfer distribution, the owners of beneficial interests in that DST will become members in the Springing LLC, and the manager, or an entity controlled by or affiliated with the manager, will become the manager of the Springing LLC.

The FMV Purchase Option is an option held by a REIT’s Operating Partnership to acquire 100% of the beneficial interests of a given DST, and it is provided for in the Trust Agreement of each DST and/or other transaction documents utilized in the 1031 UPREIT Program. In mandatory 1031 UPREIT Programs, the FMV Purchase Option gives the Operating Partnership the right, but not the obligation, to acquire the beneficial interests of a given DST in exchange for OP Units or cash, at the Operating Partnership’s discretion. The Operating Partnership generally expects to utilize OP Units when exercising FMV Purchase Options, so even though there is no guarantee that the FMV Purchase Option for any given DST will be exercised, investors in mandatory 1031 UPREIT Programs should invest with the understanding that there is a high likelihood that they will ultimately receive OP Units.

In mandatory 1031 UPREIT offerings, the FMV Purchase Option is exercisable by the Operating Partnership with respect to a given DST beginning on the first day after all owners have held their beneficial interests in the DST for at least two (2) years. In optional 1031 UPREIT offerings, the FMV Purchase Option may not be exercisable until later, often when the manager of the DST determines it is time to sell the DST’s properties.

The purchase price of the DST beneficial interests for the purposes of the FMV Purchase Option will be based on the fair market value of the properties held by the DST. The fair market value of the DST’s properties will be determined through an appraisal process utilizing one or more independent firm or firms selected by the manager of the DST in its sole discretion, less applicable liabilities and adjustments for customary prorations. Any such value shall be determined without any discounts but taking into account that the DST’s properties are subject to the Master Lease.

If the Operating Partnership chooses to exercise the FMV Purchase Option with respect to a given DST in exchange for OP Units, different investors in the DST may receive different classes of OP Units that bear different fees, as determined by each investor’s participating dealer, RIA, or other applicable selling channel. The selling agreements executed by each participating dealer, RIA, or other distribution partner will identify which particular class of OP Units their investors may receive if the Operating Partnership chooses to exercise the FMV Purchase Option in exchange for OP Units.

Distributions to OP Unitholders as of the applicable record date are generally made on a monthly or quarterly basis in amounts determined by the REIT. Specifically with respect to investors that own OP Units, distributions with respect to such OP Units are expected to be made in the same gross amounts per OP Unit that match the amounts per share of the applicable class of REIT common stock, which distributions are expected to be paid on a monthly or quarterly basis, so that a holder of one OP Unit will receive substantially the same amount of annual cash distributions as the amount of annual distributions paid to the holder of one share of the applicable class of REIT common stock (before taking into account certain tax withholdings that certain states may require with respect to OP Units).

Yes. An OP Unitholder may require the Operating Partnership to redeem any or all of the OP Units which it has held for a period of at least one year. Such OP Units will be redeemed, in the REIT’s sole discretion as the general partner of the Operating Partnership, for either cash or an amount of shares of REIT common stock with the same NAV as the OP Units that are redeemed. Notwithstanding the foregoing, an OP Unitholder generally may not submit more than two notices of redemption during each calendar year.

Please note that the redemption of OP Units is a taxable event, even if shares of REIT common stock are received by the redeeming OP Unitholder instead of cash. If the REIT elects to honor an OP Unitholder’s redemption request using shares of REIT common stock, the redeeming OP Unitholder will generally be notified in advance and will be given the opportunity to rescind his or her redemption request.