Case Studies

Real Estate Case Study: Avoiding Unrelated Business Taxable Income


Client is a real estate investment group that has put together a fund, including equity, preferred equity, and mezzanine type lending deals. The fund includes all types of investors.


The Tax-exempt investors in the fund were being allocated unrelated business taxable income (UBTI) which creates tax for the normally tax-free investor. As new funds were created, the client wanted to find a way to include tax-exempt investors without passing on UBTI.


For the new funds, a real estate investment trust (REIT) was created that parallels each investment the fund makes and provides distributions to its tax exempt owners via dividends, which does not trigger UBTI or the related tax. The investment in the fund by the tax exempt entities is consistent with the investment by other types of entities except for the allocation of income and loss items.