GP/ LP Partnership Structures · Realist Inner Circle

GP/ LP Partnership Structures

I was doing some research on ChatGPT to deepen my own understanding on GP/LP roles and responsibilities, and the answers that ChatGPT pumped out were just so concise and valuable I felt it would be worth a repost here:

In a real estate fundraising partnership structure, the division of duties and rights between general partners (GPs) and limited partners (LPs) typically follows these guidelines:

GENERAL PARTNERS (GPs)

Duties

1. **Management and Control:**

GPs are responsible for the day-to-day management and operational decisions of the partnership. This includes property acquisition, financing, asset management, leasing, and eventual sale of properties.

2. **Fundraising and Investor Relations:**

GPs raise capital from investors, manage investor relations, and ensure compliance with regulatory requirements.

3. **Strategic Planning:**

GPs develop and implement the investment strategy, including selecting target markets and property types.

4. **Reporting:**

GPs provide regular updates to LPs on the performance of the investments, including financial statements and other relevant reports.

5. **Risk Management:**

GPs handle risk assessment and mitigation strategies, ensuring the protection of the partnership’s assets.

RIGHTS:

1. **Management Fees:**

GPs typically earn management fees, which are a percentage of the capital under management.

2. **Carried Interest:**

GPs receive a share of the profits (carried interest) above a certain return threshold, often referred to as the “promote.”

3. **Decision-Making Authority:**

GPs have the authority to make decisions regarding the investment and operations of the partnership.

Limited Partners (LPs)

DUTIES

1. **Capital Contribution:**

LPs provide the bulk of the capital required for the real estate investments.

2. **Limited Involvement:**

LPs are typically passive investors, meaning they do not participate in the day-to-day management of the partnership.

RIGHTS

1. **Profit Sharing:** LPs receive a share of the profits generated by the partnership, typically after the GPs have received their management fees and carried interest.

2. **Limited Liability:** LPs have limited liability, meaning their risk is generally limited to the amount of their investment.

3. **Periodic Reports:** LPs are entitled to receive periodic reports on the performance of their investment, including financial statements and other updates from the GPs.

4. **Return of Capital:** LPs are entitled to the return of their capital investment, usually before the GPs receive their carried interest, depending on the terms of the partnership agreement.

5. **Rights to Distributions:** LPs have rights to distributions as outlined in the partnership agreement, which could include preferred returns before GPs earn their carried interest.

Key Considerations

1. **Partnership Agreement:** The specific duties and rights of GPs and LPs are detailed in the partnership agreement, which outlines the terms of the partnership, including capital contributions, profit distributions, management fees, and exit strategies.

2. **Preferred Return:** LPs often receive a preferred return on their investment before any profit-sharing with GPs occurs. This ensures that LPs get a minimum return on their investment.

3. **Waterfall Structure:** The partnership agreement usually includes a distribution waterfall, which dictates the order and manner in which profits are distributed among GPs and LPs.

Understanding the specific terms of the partnership agreement is crucial as these can vary widely depending on the structure and goals of the real estate fund.

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