What Happens to Membership Units After Payback

Question

Hi BP Members,

My question is simple (I think). What happens to membership units after all limited partner's have had their principal paid back? Assume that the operating agreement states that the equity split from LP and GP changes from 80/20 to 50/50 after payback. My question is how does this change each Limited Partner's membership units they invested in during the raising of capital? In other words, their outside basis.

Chris Soignier · Answer

That wouldn't be equitable.   The original pro rata split per limited partner s/b retained, i.e. their splits should be cut in half.    Again, that's what should happen, w/o having the benefit of having read the documentation.

Daniel G. · Answer

Chris, thank you very much for taking the time to respond. I would really appreciate it if you could provide some insight with regards to the following scenario.

In year one GP has 20% equity and Limited Partners A,B,C,D have the following interest in the property's equity.

A: 20%

B: 20%

C: 30%

D: 10%

If the operating agreement states that after payback of principal the equity split will convert into 50/50 would the Limited Partner's individual interest compress equally? So in this case 50/4=12.5% equity p/ partner. Or does it compress according to their initial basis?

I would really appreciate your input! Please help!

Chris Soignier · Answer

What does the operating agreement say?  That dictates the outcome, not what a bunch of BP'ers who aren't privy to the deal say.    I can't stress enough - if you're considering investing in a partnership, read the PPM, operating agreement, and subscription agreements cover to cover.    Still don't understand them?   Then hire a lawyer to spell it out to you in plain English.