A User's Guide to LTIP Units: A Special Form of Equity Compensation for UPREITs

In the universe of equity compensation, an "LTIP" is a commonly used term that invokes a "long term incentive program," which is any form of award of cash or shares paid or issued in order to attract, retain and incentivize management and better align their interests with shareholders generally. For umbrella partnership real estate investment trusts, known as "UPREITs," however, "LTIP Units" have come to refer to awards of a special class of limited partnership interest that take advantage of the relatively unique structure of an UPREIT: a REIT that is taxable as a corporation that holds all of its assets through an operating company subsidiary immediately below the REIT, known as its "operating partnership," that is taxable as a partnership.[1]

LTIP Units are similar in many ways to other equity compensation awards granted by REITs and other public companies to their directors, officers, employees and other service providers that are subject to time and/or performance vesting conditions and payable in shares of the company's common stock (or an amount of cash determined based on the value of such shares). Unlike these other awards, however, LTIP Units are structured as "profits interests" for tax purposes and therefore generally carry two fundamental benefits and one fundamental risk.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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