General Partners & Limited Partners: What are They?
When acquiring large apartment communities with multimillion-dollar price tags and hundreds of units to manage, investors often pool their resources together to form what’s called an apartment syndication.
When structured as partnerships, there are two primary types of investors in an apartment syndication: General Partners and Limited Partners
The General Partner (GP), also referred to as the Sponsor or Operator, is the owner and managing partner of the investment. The GP is responsible for researching and knowing the market and submarkets, building a team necessary to successfully execute deals, finding investment opportunities, underwriting and qualifying the deal, making offers and negotiating the purchase, due diligence, securing debt financing, raising equity from investors, asset management, executing the business plan including the eventual exit strategy, and investor relations. The bottom line is that the GP manages the entire acquisition and investment project from start to finish. Additionally, the GP has unlimited liability in the investment.
Note that the GP is usually not just one person. Rather, the GP is typically a business entity with multiple members performing various tasks and responsibilities of the deal. For example, one person may be responsible for working with brokers to source and underwrite deals, while another member is continually meeting with investors and raising equity, and yet another member is overseeing day-to-day operations, renovations, and asset management.
The GP makes their money from a combination of management fees, such as Acquisition and Asset Management Fees, as well as the profits returned on the investment.
Limited Partners (LP) are passive investors in the deal, and do not have any management responsibility in the project at all. In fact, it is likely that the only information the LP will have about the ongoing operations and management of the deal is from the reports and updates it receives from the GP.
The LP’s only responsibility is to contribute to funding the equity being invested in the deal.
Apartment syndications can have one LP or numerous LP’s all contributing various amounts to the equity in the investment. Their liability is limited to the extent of their share of investment ownership.
Since they have no management or operational responsibilities, the LP’s make their money completely from the returns on the investment. They often receive an ongoing return from distributions during the holding period of the investment, as well as a portion of the profits when the property is sold. Such returns can be structured in various ways, including Preferred Returns with one or more classes, profit splits, and combinations thereof.
It should be noted that LP’s can also be passive debt investors rather than equity investors. In these cases, the LP serves as a lender to the GP and receives a fixed interest rate on a regular basis until 100% of their investment has been returned.
While apartment syndications can have various entity structures, the most common consist of Limited Partnership as described here, or Limited Liability Companies (LLC) in which case the Sponsor is a Managing Member and the passive investors are non-managing passive Members.