Cost vs Equity Method for REIT vs LP accounting, investment, structure, regarding, because

agulani

I am in discussions with a portfolio manager regarding a real estate investment in a private REIT fund. The PM would prefer to invest alongside the fund as an LP rather than invest inside the fund as part of the REIT, because the investment would be treated as common stock in the REIT structure as opposed to treatment as a partnership/JV under LP structure. The LP structure would provide variable accounting under the equity method which the REIT structure would not provide.

My exam days are well behind me, and I am struggling to remember the significance of the above. Can someone help me understand the advantages of investment in the LP vs REIT structure as applies to variable accounting? What makes the LP structure have variable accounting and why would this be preferable?

Any thoughts are much appreciated.

anothercfainnyc

My guess is it would be to reduce the variability in marking the position and be less exposed to unfavorably marking to market. The main difference is public vs. private.

I believe LPs also offer tax benefits in the form of allowing pass through of losses which can then be used to offset taxable gains.

...then I think there are master limited partnerships that are publicly traded and conduct RE activity. I'm not sure how these fit in, though it doesn't look like that's what you're asking about.

former

Makes sense - thanks for the help. I think they want the variability, so they can capture the upside in future real estate appreciation. If I remember correctly they can only recognize gains from distributions under the cost method but can't recognize any unrealized appreciation in the property.