OP Units

Operating partnership units, commonly called OP units, are equity interests in the operating partnership of an UPREIT. An investor who contributes real estate or a Delaware Statutory Trust interest to the partnership in a 721 exchange receives OP units instead of cash, deferring the capital gains tax that an outright sale would have triggered. OP units are economically similar to REIT shares: they generally entitle the holder to distributions that track the REIT's dividend, and they represent a proportional interest in the partnership's diversified portfolio. Their defining feature is convertibility. After a holding period set by the partnership agreement, OP units can usually be redeemed for cash or, at the REIT's election, exchanged for REIT common shares, often on a one-to-one basis. Holding OP units rather than converting preserves tax deferral, while converting to shares (or redeeming for cash) is typically a taxable event that recognizes the previously deferred gain. Because OP units carry the original, often very low, carryover basis, many investors hold them for life so that heirs can receive a step-up in basis at death, potentially eliminating the deferred gain entirely. OP units are illiquid until converted and are usually offered only to accredited investors.