Larson

One of the strengths of United Dominion is the wealth of industry knowledge and years of experience among its executive team and board of governors. A prime example of that is Robert C. Larson, United Dominion's chairman of the board. In December 1992, the Taubman Realty Group, with Larson as chairman, invented the UPREIT, a major innovation that helped pave the way for the development of the modern REIT industry.

Prior to 1992, U.S. real estate was largely owned by partnerships, thanks to a number of significant tax advantages. The Tax Reform Act of 1986, however, eliminated many of those tax advantages. The 1986 law also altered legal requirements related to REITs, making these business structures more attractive to real estate owners. But problems remained. "A major barrier to going public for holders of real estate was that any transaction that exchanges real estate for stock in a REIT is a taxable event," Larson says. "At Taubman, we were looking at the alternatives for entering the public market, and this tax issue was a major impediment."

In 1992, Larson and the Taubman team hit on a solution: an approach called an Umbrella Partnership REIT (UPREIT).

The UPREIT is a concept that allows a real estate owner to go public without making a taxable real estate exchange, Larson says. It works this way: A REIT forms a partnership in which property owners contribute real estate assets in exchange for partnership interests, sometimes called operating partnership units or OP units. Simultaneously, the REIT contributes cash raised in an initial public offering in exchange for partnership units. The former property owners can exchange their partnership units on a one-for-one basis for REIT shares or cash, at the REIT's option. Since there is no fundamental change in ownership, there is no taxable event until the property owner actually receives REIT shares or cash. A transaction that exchanges real property for stock would be a taxable event.

The Taubman team presented the idea to the Internal Revenue Service. "As I recall, we got a quick turnaround from the IRS," Larson says. "They said that the idea was consistent with the provisions of the law. The intent of REIT legislation was always to encourage public ownership of real estate."

The UPREIT idea helped do that by permitting property owners to defer taxes until partnership units are converted to stock or cash.

"Taubman was the first UPREIT and one of the first significant REITs of the modern era," Larson says.