Limited partnerships can create incredible investment opportunities, especially when it comes to real estate. It’s no surprise that many of the most renowned private investors for commercial real estate have utilized this strategy to generate wealth and grow their portfolios. With the right foundations, tools, and secure investor management resources — limited partnerships can open up new doors and expand funding circles to purchase lucrative properties.
What Is a Real Estate Limited Partnership? (The Basics)
Limited partnerships in real estate refer to a type of investment that pools multiple private real estate investors’ capital together to develop or purchase a property. It’s sometimes referred to as a RELP (real estate limited partnership). Here are the core elements.
- A general partner manages the investment and assumes liability
- Limited partners are “passive investors” who allow for more flexible investment opportunities
Limited partnerships are popular for large-scale real estate projects and commercial property purchases or developments. Instead of one or two private investors for commercial real estate pooling massive funding, limited partnerships allow multiple investors to combine resources that would otherwise be impossible or difficult to manage.
While general partners typically have management and investment experience, they may not always have enough funding to acquire certain real estate. Limited partners, on the other hand, usually lack the experience or desire to manage investments — but want to diversify their portfolios.
When the right partnerships come together, it’s a win-win scenario.
Breaking Down the RELP Structure
Not every limited partnership will look the same. A RELP’s structure is dependent on the partnership agreement and may differ depending on the property, development, or goals of the parties involved.
Both limited partners and general partners hold equity in the deal, but their roles are entirely different. Contributions, liabilities, responsibilities, and returns are loftier for general partners. Let’s explore further.
General Partners (GP) 101
First, let’s break down the role and responsibility of a general partner.
- Sets up the partnerships
- Handles the transaction
- Secures necessary financing from limited partners
- Manages the investment
A general partner may be one individual. However, the typical setup involves creating a separate entity that acts as the partner in the deal to protect the GP’s assets and open up opportunities to participate as a limited partner.
The typical amount of equity a general partner receives is in the ballpark of 20-35% (although this may vary depending on the agreement). Additionally, general partners earn returns through fees associated with the deal, primarily due to their increased responsibility and risk. These may include a:
- Acquisition fee
- Asset management fee
- Loan guarantee fee
- Refinance fee
- Disposition fee
- Construction management fee
- And more
Again, these fees are not automatically a part of every limited partnership agreement and depend on the individual investment. The greater the responsibility and management — the higher the fees.
Limited Partners (LP)
Again, limited partners are what we would call “passive investors.” What does this mean? Well, they play a vital role in providing the necessary capital to secure or develop a property. Because they also hold equity in this real estate venture, they may earn a return if it’s profitable. Their primary benefit stems from their limited liability in a particular investment.
They’re sometimes referred to as “silent partners” and often have zero involvement in the day-to-day minutia of the investment deal. Depending on the partnership agreement, they may hold voting rights on certain matters (although major decisions usually fall on the general partner).
There are stipulations as to the amount of involvement a limited partner may have. Limited partners who spend more than 500 hours in a calendar year on the operational processes of a partnership run the risk of losing their LP status.
What to Look For in a Limited Partnership
Whether you’re a general partner or a limited partner looking to take advantage of the real estate marketplace, you’ll need to evaluate which qualities are most important for your venture. Here, we’re going to briefly discuss which characteristic a limited partner should seek in a general partner to achieve success.
- Experience in the Industry
While this should come as a given, it’s crucial that limited partners feel confident in a general partner’s real estate knowledge when participating in an agreement. Here are some questions to consider:
- What type of real estate deals have they managed?
- When was their last successful purchase or development?
- Do you have more experience with a certain type of development project, property purchase, or leasing opportunity than them?
All in all, it’s always a good idea to vet or see some semblance of experience, and more importantly, success in your general partner.
- It’s a Relatively “Hands Off” Agreement
One of the most attractive aspects of being a limited partnership is minimal involvement in the daily operations of the investment. While every limited partnership agreement is unique, most limited partners simply want to contribute capital and realize returns.
If this sounds like you, you’ll want to look for a general partner who is willing to take on all of the responsibilities involved in the property purchase or development. Now, keep in mind that the more obligations and liabilities associated with the deal, the more fees may come into play.
- A Trusted Partnership
The truth is that your general partner assumes nearly all of the risk. Additionally, if your partnership agreement is relatively “hands-off,” you’ll be relying on the general partner to return a profit and ensure success with the investment.
This means that trust is a vital component of a limited partnership. Typically, limited partnerships lack liquidity. Now, that’s not always the case, especially with premier private ecosystems for limited partners.
Part of what bolsters trust is transparency. Whether it’s commercial real estate investment accessibility, performance metrics, or constant updates — information helps create qualified LP investors and successful partnerships.
Here at EXtrance, we’ve created a way to connect general partners with a wider pool of limited partners to boost investment opportunities. The EXtrance platform is a secure hub for building real estate investment partnerships, with a wide range of analytic, communication, and documentation capabilities.
While liquidity and reliable partnerships have long plagued this investment model, we sought to solve its two major challenges. Through our blockchain integrated platform, general partners can connect with limited partners and vice versa to make deals, handle distributions, and much more.