“Master Class: The Re-emergence of Master Limited Partnerships for Financial Assets”

Real Estate Investment Trusts (“REITs”), although a popular vehicle for investments in real estate assets because they preserve the single level of taxation, do have drawbacks. One of these is that the tax law imposes certain restrictions on the type of assets that REITs can hold. As a result, investment managers do not have complete flexibility in choosing the investments and cannot always maximize the investment returns.

One partial solution has been to create a Master Limited Partnership structure, in which a separate entity, usually a publicly traded Limited Liability Company (an “LLC”), is interposed between the REIT and the investors. This structure preserves the single level of taxation while allowing for greater investment flexibility and, presumably, enhanced returns to investors.

This Stroock Special Bulletin examines some of the implications of the Master Limited Partnership structure, including limitations on the types of income that can be received by the LLC and limitations on the active management of CDOs held by the LLC.