What Are Upreits and Why Do Landlords Lose Control over Property?

In a typical UPREIT, the publicly traded REIT owns a controlling interest in the operating partnership, while the original property owner receives partnership units that may be exchanged for REIT shares at a later date, subject to lock-up periods and other restrictions. The operating partnership holds the actual real property and generates the cash flow from rents and operations. Below the operating partnership may sit subsidiary entities that hold title to specific properties or manage particular lease portfolios. This layered structure means that day-to-day landlord functions (lease enforcement, tenant communications, rent collection) may be delegated to a property management company, a subsidiary of the operating partnership, or the REIT's own management division, depending on the terms of the partnership agreement and management contracts. For a landlord contributing property, the shift from direct ownership to a partnership interest changes who has legal authority to make decisions about lease enforcement, capital improvements, and tenant disputes.

Once property is contributed to an UPREIT, the original owner typically relinquishes day-to-day control over lease administration and tenant management to the operating partnership or its designated manager. The contributing landlord becomes a partner with economic rights (cash distributions and eventual equity value) but limited operational authority unless the partnership agreement explicitly reserves certain decisions for partner approval. This means that decisions about lease renewals, tenant disputes, default remedies, and rent collection may be made by the partnership or its manager without requiring the original owner's consent. The partnership agreement governs what decisions require unanimous partner approval, what decisions fall to the general partner (usually the REIT or its affiliate), and what decisions are delegated to management. In practice, these disputes over operational control rarely map neatly onto a single rule; the outcome depends heavily on the specific language of the partnership agreement and the management contract. A landlord must carefully review these documents before contribution to understand what rights are retained and what authority is transferred.

When a landlord contributes appreciated real property to an UPREIT's operating partnership, the transaction is treated as a tax-deferred exchange under Section 721, provided the contribution is made in exchange for a partnership interest and no boot (cash or other property) is received. The contributing landlord's basis in the partnership units equals the basis the landlord had in the contributed property, so the tax gain is preserved but not immediately taxable. The gain is deferred until the landlord eventually sells the partnership units, exchanges them for REIT shares, or receives a distribution in excess of basis. This deferral can provide significant cash-flow benefits by allowing the landlord to avoid a large federal income tax bill at the time of contribution. However, the deferral is not permanent; the tax liability is ultimately realized when the partnership interest is liquidated or exchanged. A contributing landlord should work with tax counsel to model the long-term tax consequences and to understand how distributions from the partnership, changes in partnership basis, and depreciation recapture will affect the eventual tax bill.

Once property is contributed to an UPREIT, the landlord becomes a partner subject to the partnership agreement and applicable partnership law. The landlord will receive annual K-1 forms reporting the partner's share of partnership income, loss, depreciation, and other tax items, which must be reported on the landlord's personal or corporate tax return. The landlord may also be required to make capital contributions if the partnership incurs losses or if the partnership agreement requires partners to fund shortfalls. The partnership agreement typically specifies how cash is distributed (whether on a pro-rata basis, after reserves, or according to a waterfall formula), when distributions occur, and what happens if the partnership experiences operating losses. In many UPREITs, the original property owner's distributions may be subordinated to the REIT's distributions, meaning the REIT receives cash first and the original owner receives distributions only after the REIT's preferred return is satisfied. A landlord must understand these distribution mechanics and the potential for years with no cash return if the properties underperform or if capital is retained for operations or debt service.

The operating partnership, acting through its designated manager or the REIT's management division, typically holds the legal right to enforce lease provisions, collect rent, and pursue remedies for tenant default. The contributing landlord, as a partner, has no independent right to enforce leases or sue tenants unless the partnership agreement explicitly reserves such rights to the original owner or unless the partner has been appointed as a manager or attorney-in-fact. If a tenant defaults on rent or violates lease covenants, the partnership (not the original owner) must decide whether to pursue eviction, accept a settlement, or modify the lease. This means a landlord who contributed property may watch from the sidelines as the partnership makes decisions about tenant enforcement that the landlord might have made differently. The partnership's management may prioritize long-term tenant retention and operational stability over aggressive collection, or may decide that the cost of eviction exceeds the benefit of recovering arrears. A landlord should clarify in the partnership agreement whether the partner retains any consultation rights, information rights, or veto rights over material lease enforcement decisions, especially if the property is a flagship asset or if the landlord has existing relationships with major tenants.

In New York, eviction of a residential or commercial tenant requires compliance with strict procedural requirements, including proper notice, service of process, and a judgment from a court of competent jurisdiction (typically a Housing Court for residential evictions or a Supreme Court for commercial evictions). The party bringing the eviction action must be the entity with legal right to possession, which in an UPREIT context is the operating partnership (or its subsidiary holding title to the specific property). If the operating partnership is not properly named as the plaintiff or if service of process is defective, the eviction action may be dismissed, and the partnership must start over. Documentation of the partnership's authority to manage the property and enforce leases should be maintained and presented to the court, including a copy of the partnership agreement, a certificate of authority, and evidence that the partnership holds title to the property. Delays in gathering documentation or gaps in the record of partnership authority can create procedural vulnerabilities that tenants may exploit. From a practitioner's perspective, the layered structure of an UPREIT can introduce delays in decision-making and execution; a property manager must obtain approval from the operating partnership before initiating eviction, and the partnership must gather and review the necessary documentation before filing. These procedural hurdles mean that UPREIT-owned properties may face longer timelines for resolving tenant disputes compared to properties owned directly by a single landlord.

Before contributing property to an UPREIT, a landlord should obtain and thoroughly review the partnership agreement, paying close attention to the following: (1) the allocation of partnership profits and losses; (2) the distribution waterfall and the priority given to the REIT's preferred return; (3) the conditions under which the REIT or other partners may make additional capital calls; (4) the terms on which the contributing partner may exit the partnership (redemption rights, lock-up periods, and any put or call provisions); (5) the governance structure and what decisions require partner approval versus what decisions are made unilaterally by the general partner; (6) the management fee structure and whether management fees are deducted before or after distributions to partners; (7) the treatment of depreciation recapture and how the partnership accounts for basis adjustments; (8) the conditions under which the partnership may refinance or incur additional debt, and whether such debt affects partner distributions. A landlord should also consult with tax counsel to model the long-term tax consequences of the contribution, including the timing of gain recognition if the partnership units are later exchanged for REIT shares or sold. The economic incentive to defer taxes must be weighed against the loss of operational control, the risk of subordinated distributions, and the potential for the REIT or other partners to make decisions that do not align with the original owner's interests. Documentation of the landlord's concerns and expectations in writing (even if not binding) can help prevent disputes later and may inform how the partnership handles tenant issues or capital decisions affecting the contributed property.

Although the partnership agreement is the binding legal document, a landlord can strengthen its position by preparing a written summary of expectations and concerns and sharing it with the REIT sponsor or the operating partnership's management before signing. This documentation should specify: (1) any material tenants or leases the landlord wishes to protect from modification without notice; (2) any capital improvements or maintenance standards the landlord expects the partnership to maintain; (3) the frequency and content of reporting the landlord expects to receive about the contributed property; (4) any consultation or approval rights the landlord wishes to reserve for material decisions affecting the property. While such a memorandum is not a binding contract, it creates a record of the landlord's intent and may influence how the partnership treats the property during the holding period. It also provides the landlord with a baseline for evaluating whether the partnership is honoring its obligations and whether the landlord's economic interests are being protected. If disputes arise later, evidence that the landlord documented expectations in advance can support the landlord's position in negotiation or mediation.