What is a GP and an LP in real estate?
A general partner is the sponsor that manages a real estate partnership, and a limited partner is an investor who contributes capital but doesn’t manage it. In a typical apartment syndication, the GP finds the building, signs the loan, raises equity and runs the business plan. The LPs supply most of the equity and receive most of the cash flow and profit.
The terms come from limited partnership law, but many sponsors now use an LLC instead. There the sponsor is the manager or managing member and investors are the members. The economics work the same way, so people still call the two sides GP and LP.
What does a general partner do?
The general partner does the work of the deal from start to finish. Its duties are set out in the partnership or operating agreement.
- Sources and underwrites the property, including rent roll, NOI, cap rate and DSCR.
- Negotiates the purchase, arranges the loan and usually signs any loan guarantees or carve-out guaranties.
- Prepares the offering documents and raises equity from investors.
- Hires and oversees property management and runs the renovation or business plan.
- Sends investor reports, distributions and Schedule K-1s.
- Decides when to refinance or sell, within the limits of the agreement.
What does a limited partner do?
A limited partner invests money and then stays out of daily management. The LP’s main jobs are up front: reviewing the sponsor, the property and the documents before wiring funds.
After closing, there isn’t much left for an LP to do: read reports, receive distributions, file the K-1 with its tax return and vote on the few major decisions the agreement reserves for investors. Most syndications are private offerings under SEC Regulation D, and many are open only to accredited investors.
Liability: GP vs LP
Limited partners generally can’t lose more than they invest, while a general partner of a limited partnership is personally liable for the partnership’s obligations. Under Delaware’s limited partnership act, for example, a limited partner isn’t liable for the partnership’s obligations unless it is also a general partner or takes part in control of the business. A list of safe-harbor activities, such as voting on a sale or advising the GP, doesn’t count as control.
Delaware gives a general partner the liabilities of a partner in a general partnership. That’s why sponsors almost always make the GP an LLC or corporation, so their personal assets sit behind another entity.
In an LLC syndication, state law protects both sides. Delaware’s LLC act says no member or manager is personally obligated for the company’s debts just because of that role. A sponsor can still be on the hook through personal guarantees it signs for the loan.
What each side puts in
LPs bring most of the equity, and the GP brings the deal, the work, its balance sheet for the loan and, often, some of its own cash. The GP’s cash investment is called a co-invest. It is negotiated deal by deal, so read the offering documents for the amount and whether the GP invests on the same terms as LPs.
Ask whether the GP’s co-invest is real cash or fees rolled back into the deal. Real cash going in alongside yours gives the sponsor the same downside you have.
How GPs and LPs get paid
LPs are paid from distributions of cash flow and sale or refinance proceeds, while the GP earns fees for its work plus a share of profits above a hurdle, called the promote or carried interest. The order of payments is set by the distribution waterfall.
- Acquisition fee: a one-time fee when the property is bought, usually a percentage of the price.
- Asset management fee: an ongoing fee for overseeing the investment.
- Other fees: some deals add loan guarantee, refinance, construction management or disposition fees.
- Preferred return: LPs receive a set annual return on their capital, such as 8%, before the GP shares in profits. It is a priority, not a guarantee.
- Return of capital: investors get their money back before the profit split.
- Promote: the GP’s share of profits above the preferred return, sometimes with a catch-up or several tiers tied to IRR.
Worked example: a simple GP/LP waterfall
Say a syndication raises $10,000,000 of equity: $9,500,000 from LPs and a $500,000 GP co-invest on the same terms. It offers an 8% simple preferred return, then splits remaining profit 70% to investors and 30% to the GP as its promote. Over a five-year hold, the deal distributes $17,000,000 in total from cash flow and the sale.
First, the 8% pref for five years on $10,000,000 is $4,000,000. Next, $10,000,000 of capital goes back. That leaves $3,000,000, split $2,100,000 to investors and $900,000 to the GP promote.
Investors as a group get $16,100,000, a 1.61x equity multiple. The LPs’ 95% share is $15,295,000. The GP gets $805,000 on its co-invest plus the $900,000 promote, or $1,705,000, before any fees.
| Waterfall step | Amount | To investors (LPs + GP co-invest) | To GP promote |
|---|---|---|---|
| Preferred return (8% x 5 years) | $4,000,000 | $4,000,000 | $0 |
| Return of capital | $10,000,000 | $10,000,000 | $0 |
| Remaining profit split 70/30 | $3,000,000 | $2,100,000 | $900,000 |
| Total | $17,000,000 | $16,100,000 | $900,000 |
Control and voting rights
The GP controls day-to-day decisions, and LPs vote only on the major items the agreement reserves for them. Those often include selling all the assets, amending the agreement, admitting new partners or removing the GP for cause.
Read the voting thresholds closely. Some agreements let a majority of LP interests remove the sponsor for fraud or gross negligence; others give LPs almost no say. You can’t manage your way out of a bad deal as an LP, so your real control is choosing the sponsor and the terms before you invest.
Tax treatment for GPs and LPs
Most real estate partnerships and multi-member LLCs are pass-through entities that don’t pay income tax themselves. Each partner gets a Schedule K-1 showing its share of income, losses, depreciation and gains, and reports it on its own return.
- Passive losses: under IRC 469(h)(2), a limited partner interest generally isn’t treated as material participation, so LP losses are usually passive and offset only passive income until you sell your interest.
- No $25,000 rental allowance: IRC 469(i)(6)(C) says a limited partner interest generally doesn’t count as active participation, so the special $25,000 loss allowance usually doesn’t apply.
- Self-employment tax: IRC 1402(a)(13) excludes a limited partner’s distributive share from self-employment income, other than guaranteed payments for services.
- GP fees: acquisition and asset management fees paid to the sponsor are ordinary income to it.
- Carried interest: under IRC 1061, gain on a promote held for services is long-term only if held more than three years. Regulations exclude section 1231 gain, which includes most gain on rental buildings held over a year.
- Depreciation: deals often use cost segregation and bonus depreciation, and depreciation recapture applies when the property sells.
GP vs LP comparison table
This table sums up how the two sides differ in a typical multifamily syndication.
| Factor | General partner (GP / manager) | Limited partner (LP / member) |
|---|---|---|
| Role | Finds, finances and runs the deal | Provides capital, stays passive |
| Capital | Co-invest, often a small share | Most of the equity |
| Liability | Unlimited for a GP of an LP, so usually held through an LLC; loan guarantees | Limited to the amount invested |
| Pay | Fees plus promote | Preferred return, capital back, share of profits |
| Control | Day-to-day and most major decisions | Votes only on reserved matters |
| Tax form | Schedule K-1 | Schedule K-1 |
| Passive loss status | Depends on participation | Generally passive |
| Time commitment | Full-time job for the life of the deal | Due diligence up front, then reading reports |
GP vs LP in an LLC syndication
In an LLC syndication, the GP role is filled by the manager or managing member and the LP role by members. Many sponsors use a manager-managed LLC because it gives limited liability to everyone and lets the operating agreement set voting, fees and the waterfall.
Often there are two tiers. Investors buy membership units in the property-owning LLC, and the sponsor’s own LLC serves as manager. The labels change, but your questions about fees, the pref, the promote and voting stay the same.
The tax rules can differ. IRC 1402(a)(13) refers to a limited partner, and how it applies to LLC members, or to limited partners who are active in the business, has been argued in court. Passive LLC members should have their CPA review how their K-1 is treated.
Questions an LP should ask a GP
The best protection for a limited partner is asking hard questions before investing, since you have little say afterward. Start with these.
- How many deals have you taken full cycle, and how did actual results compare with projections?
- How much of your own cash is in this deal, and on what terms?
- What are all the fees, and when are they paid?
- Is the preferred return cumulative and compounding, and is there a GP catch-up?
- Who signs the loan guarantees, and what are the loan’s maturity and rate terms?
- What decisions require an LP vote, and can LPs remove the GP?
- Can you make capital calls, and what happens if I don’t fund one?
- How often will I get reports and K-1s?
How this works for a 5+ unit apartment building
For a 5+ unit apartment building, the GP buys the property through a single-purpose entity, finances it with a mortgage and raises the rest of the price from LPs. Cash flow after debt service is paid out through the waterfall, and the big payday usually comes at a sale or refinance.
Multifamily suits this split because apartments need hands-on management that most passive investors don’t want to do. The GP handles tenants, renovations and lenders, and the LP gets to own part of a bigger building than it could buy alone, with depreciation flowing through on the K-1.
Investing with Skyline Capital Investments
Skyline Capital Investments acts as the sponsor, or GP, on apartment buildings with 5 or more units, and works with passive investors through its Investor Network. Members hear about new multifamily opportunities as they come up.
To join, use the form on this page. Offerings are made only to eligible investors through offering documents, and most are limited to accredited investors.
