By Ben Roper and Hal Reinauer
There’s a conversation happening in estate attorneys’ offices and around family dinner tables across the country, and it usually goes something like this: an owner of a multifamily property, often held for decades, begins to think seriously about what happens next.
The asset has been good to them. It generates income. It carries emotional weight. And the plan, loosely held, is to pass it along the same way it arrived: intact, appreciated and relatively uncomplicated.
What most owners never fully reckon with, and what is rarely framed clearly in advisory conversations, is that the building itself may have other plans.
A Closer Look At What You’re Holding
If you own a multifamily property that’s been in service for 15 years or more, you are holding something that looks, on paper, like a straightforward piece of wealth. The loan may be seasoned or paid off. The rents are covering expenses. The value has likely appreciated meaningfully. And when the asset eventually transfers, the next owner may benefit from a stepped-up basis, resetting the tax position.
That part is real, and it matters. But it solves exactly one problem: the tax problem. What it does not solve is the physical problem. And for many assets, that is quietly becoming the dominant variable.
What Time Does To a Building
The physical condition of a property is often the least examined variable going into a financing, and the one that ultimately carries the most weight. Every lender, whether agency, HUD, life company or bank, requires a third-party assessment of the asset. These reports evaluate major systems, assign remaining useful life and project capital needs over the loan term. That process becomes increasingly important as properties age, not just at 40 or 50 years, but often well before that.
Once a building moves beyond its first decade or two of life, its major systems begin entering replacement cycles. Roofs, HVAC, parking surfaces, plumbing, interior finishes: these don’t fail all at once, but they don’t fail in isolation either. The needs tend to cluster. Owners often maintain properties well, but even well-maintained buildings accumulate capital requirements that don’t show up in day-to-day operations. The issue is not neglect. It’s timing.
The Financing Reality, Including HUD’s Constraints
This is where physical condition becomes more than an operational issue. It becomes a financing constraint. Across all lenders, the principle is the same: the building must be able to support the loan term.
For HUD financing, this is explicit. Programs like HUD 223(f) tie loan term and amortization directly to the remaining useful life of the property. In practice, the maximum term is typically the lesser of 35 years or 75 percent of the property’s remaining economic life.
If major systems have limited remaining life, the effective loan term shrinks. If required repairs exceed program thresholds, the deal shifts entirely from a refinance to a substantial rehabilitation execution. HUD is not simply evaluating whether the building works today. It is underwriting whether it will remain viable over the full duration of the loan.
Other lenders approach this differently in structure but not in outcome. Agency lenders adjust reserves and proceeds. Life companies often step away from assets with deferred capital exposure. Banks reprice or reduce leverage. The conclusion is consistent: aging physical condition compresses financing options.
What This Means for the Next Owner
This is where the disconnect tends to occur. From a planning perspective, the expectation is simple: transfer the asset, preserve value and allow the next owner, whether family or otherwise, to decide what to do with it. But the reality is more complex.
The next owner does not receive a clean asset. They receive a building with a defined capital timeline, a financing market that evaluates that timeline rigorously and a set of decisions that must be made relatively quickly.
Those decisions are not theoretical. They will need to fund capital improvements or accept constrained and more expensive financing. They may have to sell into a market that already reflects the building’s condition or continue operating while costs increase and competitiveness declines. The stepped-up basis may reset taxes, but it does not reset the building.
The Operational Reality No One Emphasizes Enough
There is another layer that often gets less attention: the operational burden of older assets. As properties age, they become meaningfully harder to manage. Examples include more frequent maintenance issues, greater tenant turnover tied to condition, increased vendor coordination, higher variability in expenses and more hands-on oversight required at every level.
At the same time, the competitive landscape has shifted. Today’s new multifamily product delivers modern layouts, updated amenities, energy efficiency, lower near-term maintenance costs and stronger tenant appeal. To remain competitive, older properties must receive continually reinvestment, not just to maintain function, but to maintain relevance. That reinvestment is not optional. It is ongoing, capital-intensive and operationally demanding.
The Capital Cycle Problem
What makes this especially challenging is that capital needs are not linear. They tend to arrive in waves. A property may operate smoothly for years, and then, within a relatively compressed timeframe, roof systems need replacement, unit interiors require full renovation and mechanical systems approach end-of-life all at once.
Executing that level of capital program is not trivial. It requires budgeting and capital sourcing, construction management, tenant coordination, leasing disruption mitigation and careful financing alignment. Even experienced owners find these periods demanding. For a subsequent owner stepping into the asset fresh, the learning curve and the financial commitment can be significant.
What The 721 UPREIT Actually Changes
There is a structure that addresses many of these variables directly: the 721 UPREIT exchange. Through this structure, an owner contributes a property into a REIT operating partnership in exchange for OP units, deferring capital gains and depreciation recapture.
But beyond tax deferral, the more relevant shift is structural. The next generation receives a financial interest rather than an operating asset. They get exposure to a diversified portfolio rather than the concentrated risk of a single property, income without direct management responsibility, and liquidity pathways that don’t depend on the fate of one building.
Most importantly, the capital and operational burden of the property transitions to an institutional platform with the scale and infrastructure to manage it. That is a meaningfully different thing to inherit.
The Questions Worth Asking Now
This is not an argument for a specific outcome. It is an argument for clarity. If you own a property that has been in service for 15 years or more, it is worth asking what a current physical assessment would actually reveal, and how lenders would size and structure a loan today given remaining useful life constraints.
It is worth understanding what capital will be required over the next five to 10 years, how competitive the asset is relative to newer product in the market, and what level of sustained effort will be required to operate and improve it.
Because here is the other side of that question: owners who have made the move into a 721 UPREIT exchange haven’t just solved a tax problem. They’ve traded a single aging asset for a seat in a diversified, institutionally managed portfolio generating consistent income without the phone calls, the capital calls or the headaches.
They’ve preserved wealth across generations in a form their heirs can actually use: liquid, passive and professionally managed, rather than handing down a building that comes with a to-do list longer than the deed. The equity they spent decades building doesn’t disappear. It compounds. And it does so without them having to manage a roof replacement in year three or fight a lender over remaining useful life in year five.
What, exactly, is the next owner inheriting: an asset, or a set of decisions? And if it’s decisions, why not make the right one now?
Ben Roper is REIT Specialist at Capital Square, the sponsor of Capital Square Housing Trust, a non-traded REIT focused on multifamily acquisitions through 721 UPREIT exchange transactions. Hal Reinauer, Anchor Point Real Estate, advises owners of multifamily assets on financing, capital planning and strategic transitions.