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Cash, 1031 or UPREIT: How to Compare a Storage Offer

If you own a self-storage facility you have probably heard from the large storage REITs more than once. When an offer arrives, the first job is to put it next to your own numbers.

Start with the cap rate the offer implies

Divide your net operating income by the price offered. That is the cap rate they are paying on your numbers. Then ask what income and costs they used, because a buyer's net income is often different from yours.

Cash

You receive cash, less selling costs and your loan payoff. Tax on the gain is due for the year of the sale. Depreciation you have taken can be taxed differently from the rest of the gain.

1031 exchange

A like-kind exchange can defer the tax if you buy other real estate. An intermediary holds the cash, you name the replacement property within 45 days and you close within 180 days. You stay a landlord.

UPREIT (Section 721) exchange

You contribute the facility to the REIT's operating partnership and receive OP units instead of cash. The tax is deferred until the units are redeemed or sold. Ask about:

• What the units are worth at closing and how that is set.
• The lock-up before units can convert to common shares.
• Distributions on the units compared with the shares.
• What happens to your loan, and whether a payoff or assumption creates tax.
• Tax protection if the REIT sells the property later.

This is education, not tax advice. Bring your tax adviser and a real estate lawyer in before you sign anything.