No…..GP/LP is not some new gender identify terms that popped up recently….
Limited Partners (“LP” or “JV” Equity, or aka the “Passive Investors”) could be individuals (such as a peon retail investor like me) or institutions with money they wish to invest in real estate but are resource constrained with regards to time, energy and expertise on identifying, acquiring and operating an investment.
General Partners (“GP”, “Sponsor” or “Operator”) are groups with expertise in identifying, acquiring and executing real estate deals but are resource constrained in capitalizing the investment.
Deals purchased in this manner typically involve the LP contributing the vast majority of total equity (often 85% – 95%) with the GP or Sponsor responsible for the remaining 5% – 15%. Such ventures often feature an incentive mechanism with disproportionate sharing of profits, known as the “promote” or “carried interest.” So, while a GP may only contribute 10% of the equity, they stand to earn much more than 10% of the profits upon successful execution of the business plan.
LP’s offer these “promotes” (again, the term is nothing more than an industry jargon that means the same as profit sharing) not only as compensation but also extra incentive to the GPs because the LPs rely upon GP’s to:
- source opportunities (this alone is a pain….and we’ll blog about this in the future)
- underwrite and discover hidden value;
- pursue, negotiate and win deals;
- develop sound business plans;
- conduct due diligence;
- secure financing;
- close the deal and hire the right vendors (e.g. property manager)
- efficiently manage the projects and execute the business plans (i.e. asset manage)
- administer distributions, call capital (if deals provision & warrant), prepare K1s, and deal with lots of other paperworks + update investors periodically on progress;
- finally (drum roll please…) dispose of assets and deliver superior and outsized returns!!!!
LPs want to incentivize GP’s to perform all of the above with a big fat carrot, plus a piece of bacon perhaps as a bonus, dangling in front of them. In the end, the partnership between LPs and GPs enable them to pool resources together to accomplish more than what they could alone. The partnership arrangement results in happy ending for everyone involved.
Cha Ching! Cha Ching!
If you want to learn more about investing in direct real estate projects as LPs or aspire to become GPs one day but want a guiding hand from seasoned professionals, contact us for coaching and mentoring opportunity.