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Brief overview of what an LP is and what a GP is...

Today we're going to talk about some terminology that is used a lot that may be new to some people.  GP v LP 

GP is general partner - also a managing partner 

LP is limited partner - also called a silent partner

General partners run the company and make the decisions for the company. They are responsible for legal compliance, profitability, and determine if/when to refinance or sell the property.

Limited partners generally don’t have duties or responsibilities and can’t make decisions for the company. For this reason, they're also referred to as passive investors.

General partners shoulder the liability in the company - litigation or financial problems, and in certain scenarios, this liability may extend to personal assets.

Limited partners are shielded from liability and may only lose the amount of money they invested.

GP ownership is based on the various responsibilities in operating the company and the amount of risk that person is exposed to. 

LP ownership is typically purchased by investing funds and is generally proportionate to the amount of money invested in the deals.

Overall ownership of a company is split between GPs and LPs. Like public companies, ownership is determined by shares, but the types of shares that GPs and LPs own are different. For example, an LP may purchase class A shares and a GP may have class B shares. The actual  letters are not important, could be class C or D or E shares. What’s important is that there is a distinction between the types of shares.

Returns to the GPs and LPs are governed by the company operating agreement. In general, in apartment syndications, the GPs get paid for running daily operations, which amounts to a certain percentage ownership in the company with certain rights to incomes and fees.  

Now, a lot of people that follow us are syndicators or trying to get into the syndication game, so here's a follow-on question that I'll answer:

What benefits are there as a GP?

• Experience - banks look at a groups credibility, so if you want to eventually be a deal sponsor, it is helpful to have had some GP experience in the past.
• Not only banks, but CRE brokers also look for viable buyers and experience in a GP contributes to your track record.

What benefits are there as an LP?

• Passive income.
• Learn from operators - investor communication, investor documents like the operating agreement, PPM, due diligence documents, financial reports, etc.  You can educate yourself through an investment that also pays out returns. That sounds like a win-win scenario to me.

Each individual investment opportunity should have a company operating agreement which clearly defines the responsibilities of the GP and the limits of their authorities.  It should also clearly define the ownership structure and exactly how and when any funds are distributed.  So, please make sure you review the operating agreement thoroughly before making any investment decisions.

Originally aired on July 3, 2020