In commercial multifamily real estate, there’s a language that is spoken when you are connecting with brokers, property managers and other investors in the profession. To avoid sounding like a novice, an investor must be fluent with the real estate terminology to be taken seriously. Let’s take a minute to breakdown one of those terms.
General Partnership (GP)
- All the liability for general partners.
- Control over day-to-day operations.
Limited Partnership (LP)
- Unlimited liability for general partners.
- Not typically held responsible for business debts and liabilities.
- Pass-through taxation where income tax is not paid by the business. Any profit or loss is paid at the individual level.
- Fewer formal requirements and paperwork with limited partnerships than corporations.
- Benefit: silent partners
Limited Liability Partnership (LLP)
- Professional service business
- Can only be created by certain types of professional service business. Example: accountants, attorneys, architects, dentists, doctors, and other fields treated as professionals under each states law.
Limited Liability Limited Partnership (LLLP)
- Not recognized in all states.
Tax considerations for partnerships
- GP, LP, & LLP are all taxed the same.
- No tax is paid by the partnership.
- Schedule K issued to each owner.
When forming a partnership consider it like a marriage. You want to know who you are marrying.
Often times investors confuse the different partnership models. Here is the difference between a joint venture and a syndication.
Joint Venture (JV) – multiple parties coming together to work and compile resources to purchase a real estate asset and conduct the proper business plan for its use.
Syndication – In real estate it used for buying large apartment complexes or buildings that the parties involved wouldn’t normally be able to purchase and handle individually. It allows companies to pool their resources and share the risks and returns.
Focus of JV:
- Consider that partnership equal to a marriage.
- Know the members and make sure you have similar
goals for the asset.
- If one wants to sell in year 3 and you want to hold it. Don’t go in thinking one of you are going to change each other’s minds. Have a plan that you all agree with.
- Make sure there are legal docs when you have an entity. Review the operating agreement and know your rights.
- Know the members and make sure you have similar
goals for the asset.
What happens if there is a fall out in a partnership?
- Go back to the operating agreement and know what you can do.
- Is there going to be a buyout?
- What is the value of the percentage you are buying? Stick to your principals because if your partner is saying the building is valued at $2 million dollars when stabilized and the building is emptied. If the building is not generating revenue, then the building is not worth $2 million.
- Consult with your attorney
- Come to an agreement and be cordial with one another. Go your separate ways.
- Don’t talk about other partners unless you are lifting them up. Others will learn from working difficult partners what they are about. Partnerships are long term when it comes to investing.
If you are looking to syndicate your own deal, please understand who you are partnering with prior to any involvement in any deal. There are usually red flags that others might be able to spot better than you. It takes time to cultivate the relationships and partnerships, that is another benefit of investing passively that you are leveraging experienced operators who already have built up those relationships.
By learning these concepts and terms, you’re separating yourself from the novice investor looking to be more active than passive. Here’s where you can learn more multifamily investing terms.
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