What Do LP And GP Stand For In Real Estate? Learn More About These Essential Roles
Co-Founder and Managing Partner of Disrupt Equity. Learn more about our multifamily investment opportunities by visiting our website.
In real estate investing, everyone has a role in the project that is critical to its success—whether that's the person that finds the deal, the investors or even the company that takes care of finding tenants. Two important roles of any real estate deal are the LPs and GPs. What do LP and GP stand for? Let's find out and see how these roles work together to make real estate deals happen!
What do LP and GP stand for?
The definitions of these terms are simple:
LP stands for limited partner. GP stands for general partner. General partners can also be referred to in the real estate industry as sponsors or the sponsorship team.
Both roles are essential for making a real estate syndication deal happen. One provides the equity, and the other does all the legwork, including finding a prospective deal, raising capital and seeing it through to completion.
What is a general partner?
The general partner(s) of any real estate deal is the "brains" of the operation. They are the ones driving the deal from inception to completion.
General partners typically handle:
- Finding the real estate property.
- Raising capital.
- Arranging the financing.
- Hiring and working with vendors.
- Making day-to-day decisions about the investment strategy.
- Selling the building after some time (typically five to 10 years).
The general partners are the ones who make the deal work, and as such, when engaging in any real estate transaction, you must trust and have confidence in the GPs!
What is a limited partner?
A limited partner has one job and one job alone: Provide investment money.
That's right! All limited partners do is provide a slice of the equity financing necessary to make the deal happen.
If something goes wrong with the real estate deal, the GPs will face issues, not the limited partners. They merely provide an investment of capital in exchange for equity in the building.
In exchange for their investment, limited partners receive a good rate of return, and they also get a piece of the sale when the general partners sell the building for a profit in the future.
How does this work in commercial real estate?
To illustrate how GPs and LPs work together in commercial real estate, let's go through an example of a multifamily real estate deal. Suppose a GP sees a $10 million apartment building that seems like a great investment opportunity. The general partner will put together a prospectus and information to raise capital from LPs. This prospectus will include the projected returns, risks and strategy for the investment.
Once the general partner has raised enough money to acquire the commercial asset, they will buy the building, organize the property management, and once the business plan has been executed, eventually sell the property, closing out the original loan and distributing the earnings to the investors.
Along the way, the GP will distribute rental money (passive income) to investors as a form of return. They'll also handle all the tenant contracts and other decisions along the way.
What do the LPs and GPs typically earn?
Limited partners put in money and receive cash flow returns and a final lump sum payment at the end, representing their share of the building sale proceeds.
Let's assume that an LP invested $100,000 into the apartment building above. Further, suppose the investment pays an 8% cash-on-cash return annually, and the GP decides to hold onto the building for five years. In this example, the investor would earn $8,000 per year for five years, totaling $40,000. Assume the building sells for $12 million after all renovations, and to keep things simple, let's assume the loan amount is still $8 million. The total proceeds from the sale would be $4 million, and the investor's portion would be $200,000. The LP would then receive $240,000 total from their original $100,000 investment, representing a profit of $140,000 or a total ROI of about 19% per year.
When it comes to GP returns, GPs get compensation for driving the transaction through various fees throughout purchasing and owning the property. The four most common fees are:
- Acquisition: 1%-2% of the deal size, or somewhere between $100,000 and $200,000 in the example above.
- Management: 3%-6% of the property's gross income annually.
- Asset Management: 1%-2% of the total invested equity.
- Disposition: 1%-2% of the property's selling price.
Lastly, in addition to cash-on-cash returns and appreciation, one of the incredible benefits for LP investors is the pass-through tax benefits. Any depreciation that takes place on the property is passed to LP investors in the form of K-1s. Many of the projects target a 30%-50% tax write-off in year one of the investment.
Both LPs and GPs are necessary for a successful real estate deal. The general partner does most of the legwork and research. In contrast, the limited partners invest the money and have limited liability and input in any decision-making process.
Whether you choose to be a limited partner or a general partner, now is the best time to get started. Commercial real estate is one of the best investments out there.
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Cofounder and Managing Partner of Disrupt Equity. Learn more about our multifamily investment opportunities by visiting our website. Read Feras Moussa's full...