During the pandemic 23 million Americans adopted pets, leading to a matching increase in demand for veterinary care. In response, Terravet Real Estate Solutions, a Pennsylvania-based landlord, has announced that it will scale its pool of real estate specifically to veterinary facilities via an Umbrella Partnership Real Estate Investment Trust (UPREIT) structure. They have announced their first round of acquisitions will be in high-growth, suburban metropolitan markets.
An UPREIT allows property owners to contribute to an operating partnership (OP), which is owned by the REIT, in exchange for partnership interest in the OP.
This is generally a tax-deferred transaction under Section 721. Under Section723, the OP acquires contributed property with a carryover basis. Under Sections 705,722 and 752, the contributor’s tax basis in the OP interests received is equal to its tax basis in the property contributed, adjusted for debt.
Depreciation and built-in gains on the contributed property are governed under Section 704(c).
The OP structure was designed to mitigate potential gain recognition under Section 351(e) and Section 357(c) on contribution of property to a corporation and acts as a substitute for like-kind exchanges. The partner receives liquidity via redemption rights for cash or REIT stock. However, an exchange of OP units for REIT stock is deemed a taxable transaction.
To form an UPREIT, veterinarians would contribute their privately-owned property to an OP and join a partnership with multiple assets, providing the benefit of diversification.
This structure can give small business owners the chance to reduce risk, defer taxes and increase value.
A pool of veterinary real estate has not existed at a large scale until now and it should be interesting to see what industry may be next. If you, or someone you know, has formed a REIT/UPREIT or is thinking of doing so, please reach out to the Mazars REIT Practice for additional insight.