Limited Partnerships
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Limited Partnerships

Limited Partnerships are a great way to invest in real estate, without incurring a liability beyond the amount of your investment. However, an investor is still able to enjoy the benefits of appreciation and tax deductions for the total value of the property. LPs also can be used by landlords and developers to buy, build or rehabilitate rental housing projects using other peoples money. If you are seeking passive real estate investments, or have theability to do a project and are willing to do the work, but need to raise capitol, the concept may be right for you.

 

 

Limited Partnerships - The primary purpose of LPs is to limit investor liability to the amount of their investment. But LPs allow the "pass through" of all the property's tax benefits to the investors, and also unlike corporations, their profits are only taxed once. They allow centralization of management, through the general partner. They allow sponsors/developers to maintain control of their projects while raising new equity.

Who makes decisions in a Limited Partnership? The terms of the partnership agreement, governing the on-going relationship, are set jointly by the general and limited partner(s). Once the partnership is established, the general partner makes all day to day operating decisions. Limited partner(s) may only take drastic action if the general partner defaults on the terms of the partnership agreement or is grossly negligent, events that can lead to removal of the general partner.

Who owns what? Ownership interests of the Limited Partnership are split between the limited and general partners according to a negotiated formula. Limited partners can buy up to 99 percent ownership of profits/losses and cash flow (excluding fees to the general partner). The general partner retains the 1 percent or more remaining ownership of profits, losses and cash flow (plus any agreed upon fees).The limited and general partners split any profits from sale or refinance of partnership assets. The split generally provides an incentive to the general partners who may receive up to 50 percent of profits.

The General Partners Rights: The specific rights of each party are negotiated in the Partnership Agreement. In general, the general partner has the right to make all the day-to-day and development decisions, to determine how much cash to distribute to the limited partner(s) versus how much to hold in reserve, and to assess possible sales proposals.

The General Partners Obligations. The general partner must complete the project as proposed, must manage the partnership and the business as agreed upon in the partnership agreement. and must, generally, guarantee any additional funding needed to complete the project (repayable with interest) In addition, the general partner oversees construction, leasing. property management. and maintains the books and records of the partnership. It must submit periodic reports to the limited partners(s) on the projects financial condition and status, including analyses oŁ the propertys sale potential. The general partner may not withdraw without the approval of the limited partner.

The Limited Partners Rights - are few: to be informed of operating conditions: to approve a sale or refinancing; and to remove the general partner for gross negligence or breach of contract.

The Limited Partners Obligations. The limited partner(s) have the obligation to contribute equity in the form of either land and improvements and/or dollars.

General Partners Fees. The general partner should receive the following fees:

·        Developer Feefor developing the project

·        Property management fee- for managing the on-going operations of the project.

·        Partner management fee - for managing the operations of the partnership.

·        Incentive management fee - structured as up to one third of the cash flow.

Distribution of Cash Among the Partners. There are three ways in which the partnership receives cash which is to be distributed. They are:

1.      Development financing proceeds.

2.      General operations and cash flow.

      3.   The sale or refinance of assets.  

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