It’s True: LTIP Unit Compensation is a “Win-Win” for REIT Shareholders and Management

In its May 31, 2026, report on Executive Compensation and Corporate Governance, leading independent research firm Green Street Advisors highlights numerous favorable trends in the public REIT sector. The report notes that growth in CEO compensation in the REIT sector over the past five years has been less than that of S&P 500 companies and that annual pay for top executives at public REITs accounts in the aggregate for only 0.10% of enterprise value. At roughly one-fourth of total G&A, the report underscores that the G&A load for public REITs is smaller than that imposed by other real estate vehicles, such as non-traded REITs or private equity funds. In a companion “Heard on the Beach” column published the same day, Green Street also addressed executive compensation structures at public REITs, noting that OP unit-based compensation is generally economically equivalent to traditional restricted stock awards with substantially similar accounting attributes, and the use of such compensation generally looks like a “win-win” for REIT shareholders and management teams.

After acknowledging these favorable trends and highlights, Green Street then advances a categorical criticism of OP unit-based compensation generally, arguing that it may create misalignment between management and shareholders. Green Street speculates that accumulated tax deferrals embedded in OP unit-based awards — so-called “tax time bombs” — might disincentivize affected executives from pursuing value-maximizing transactions. In the governance report, Green Street promptly acted on its view by increasing the weight given to the form of compensation in its governance framework, giving preference to companies with minimal usage of OP unit compensation practices. Governance scores relating to the use of OP unit compensation increased from 0% to 7% of the total score, resulting in overall REIT governance scores trending lower on average.

We believe Green Street’s governance scoring serves a valuable function in the public REIT sector and its annual executive compensation study is a genuinely useful resource for the REIT investment community. But, as we contended a decade ago with respect to MUTA, corporate governance in the REIT sector is not one-size-fits-all, and we are concerned that Green Street has applied its revised methodology here with too broad a brush. In our experience, properly structured LTIP Unit compensation serves as a superior vehicle for aligning management and shareholder interests in the vast majority of cases. In our recent white paper, Unlocking the UPREIT Structure: A Comprehensive Guide to LTIP Units as Currency for Incentive Equity Awards, we covered in great detail the numerous variants in OP unit-based compensation for public REITs, including a variety of structuring alternatives and examples. Green Street’s new check-the-box, one-size-fits-all approach seemingly penalizes a majority of its coverage universe overnight. 

Specifically:

• Available deal-structuring toolkit undermines the M&A friction argument. The possibility of “tax time bombs” is a narrow, theoretical risk that is exceedingly unlikely to ever amount to “poor governance.” In today’s sophisticated deal-making environment, UPREIT go-private transactions are regularly structured to avoid LTIP gain recognition without any price reduction, using techniques similar to those deployed to avoid triggering tax protection liability for property contributors. Focusing solely on hypothetical — and in practice remote — risks ignores this entire toolkit and presents as a systemic governance problem what sophisticated practitioners resolve as a routine deal-structuring question.
• The entrenchment argument has no empirical foundation. The research report offers no case studies, no regression analysis, and no evidence that any REIT has rejected a value-maximizing transaction because of accumulated LTIP Unit gains, and makes no attempt to show that accumulated LTIP Unit gains are material relative to enterprise value, deal premiums, or change-of-control payments. Indeed, the theoretical entrenchment concern would apply with equal force to the vastly broader universe of corporate insiders holding unrealized gains in restricted stock, stock options, and deferred compensation — yet no governance rating agency penalizes those. There does not appear to be any principled basis for singling out LTIP Units or the REIT sector specifically.
• LTIP Units are not the same as contributor OP units. The reports appear to conflate OP unit compensation with OP unit contribution transactions. In addition to the fact that OP unit contribution transactions typically represent a much higher dollar value than LTIP awards, another important distinction is that LTIP Units generally do not have “negative capital accounts” or negative basis to the same extent as is commonly found in OP Unit contributions. As described in greater detail in our recent white paper (Unlocking the UPREIT Structure: OP Unit Transactions for REITs), negative capital account recapture in OP unit contribution transactions can lead to tax liabilities that substantially diminish the economic return to an OP contributor. This is not the case with LTIP Units.
• Penalizing tax efficiency has no precedent in governance practice. Green Street’s governance scoring has always appropriately focused on how much an executive receives, not how that receipt is taxed. Penalizing LTIP Unit use based on the latter question imports a notion of mandatory tax equivalence between executives and shareholders that has no precedent in governance practice and no rational basis in the broader compensation market.
• A uniform approach is simply the wrong analytical tool. Green Street shifted five governance points from “Business Dealings with Management” to “Divergent Tax Basis of Insiders” on the grounds that divergent insider tax bases are “more widespread than previously thought.” That methodological change penalizes 59% of Green Street’s coverage universe without regard to the type, terms or design of the awards. The appropriate framework would be to evaluate the type of LTIP Unit instruments granted and a host of other factors. In our recent white paper (Unlocking the UPREIT Structure: A Comprehensive Guide to LTIP Units as Currency for Incentive Equity Awards), we covered in great detail all the LTIP Unit variants, with structuring opportunities and examples, that should be a strong basis for the fact-based analysis LTIP Units deserve. A check-the-box, one-size-fits-all approach cannot substitute for that analysis.

In particular, we believe the following features of LTIP Units both mitigate the concerns articulated by Green Street and amplify the alignment between REIT executives and shareholders:

• Distinctions between different instruments. LTIP-based compensation generally includes both awards designed to replicate restricted stock and awards designed to replicate options, and these have materially different economic profiles and alignment dynamics. Both variations can be designed with the full panoply of performance and/or time-vesting features to create maximum alignment between management and shareholders without the economic compulsion of liquidating incentive equity upon tax gain recognition at vesting. Thus, LTIP Units intrinsically increase “skin in the game” for management. In addition, awards designed to replicate options have zero value unless the stock price increases, making them more shareholder-aligned than restricted stock. A single framework that treats these instruments identically misses the mark.
• Grant sizing dynamics can favor shareholders. Because LTIP Units carry book-up risk (i.e., the risk that the unit never achieves economic parity with a common unit), they typically carry a lower GAAP fair value than comparable stock awards. No-sale covenants post-vesting further reduce FFO burn. On a pound-for-pound dilution basis, LTIP grants frequently represent both lower economic cost and lower dilution to shareholders than equivalent share-based awards. Green Street’s penalty focuses, in part, on the failure of tax savings to trickle down to shareholders through reduced G&A expenses, which is the wrong lens through which to evaluate LTIP Unit compensation.
• The book-up mechanic and high water mark provisions directly refute the entrenchment argument. Standard high water mark provisions restrict book-gain allocations to LTIP Unit holders unless the stock price exceeds its level at grant. Underwater LTIP Units may be economically worthless, and upon a change of control, vested FVLTIP Units whose book capital accounts have not reached the target balance will suffer an economic loss that would not have occurred with restricted stock. The executive may receive nothing for those units in a take-private. The entrenchment dynamic Green Street posits therefore runs the other way: underwater LTIP Units give executives an incentive to push for a higher deal price, not to block a transaction.
• Holding period requirements reinforce alignment. LTIP plans typically require recipients not to transfer units for at least two years from grant, and long-term capital gain treatment may require a three-year holding period under the carried interest rules. These constraints make LTIP Unit holders structurally more committed to long-term REIT performance to avoid the carried interest rules risk than restricted stock recipients, who can sell shares at vesting to cover taxes and monetize the balance of their award far sooner.
• Deferral of taxation further strengthens alignment. Executives who defer tax recognition maintain deeper, longer-dated exposure to REIT stock performance than those in traditional awards who have already monetized shares at vesting and may be incentivized to diversify. 

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As noted above, we believe Green Street’s governance scoring serves a highly valuable function in the public REIT sector. Our views above are expressed in the spirit of constructive dialog and mutual respect. We look forward to the discussion initiated by Green Street on the merits of including OP unit currency in the incentive equity programs of public REITs.