Do you trust the pilot to get you to your destination safely? Do you know where you want to go? These are questions you might not consider when investing in multifamily real estate, but they are important. The structure of a multifamily real estate syndication deal is comprised of GPs and LPs. The general partners (GPs) of the deal are like pilots. They are responsible for the deal from takeoff to landing. The limited partners (LPs) are like passengers. They are along for the ride.
General Partners
A general partner is one of two or more investors who jointly own a business, in this case we are talking about a multifamily syndication. It is structured so that the general partners run the day-to-day operations of the business. For multifamily this includes a wide variety of tasks such as assembling the team, finding and closing on deals, asset management, managing capital expenditures, investor relations, etc. The list of responsibilities for a general partner can be quite extensive.
General partners for multifamily syndications are compensated for performing all these tasks. They take on a lot of risk sometimes by putting up hard money. They also take on risk by having their reputation on the line.
The general partners are the pilots of the deal. They are in the cockpit with all the switches and duties to perform. They are the ones in the control.
Preflight
Before take-off the GPs are doing all the flight planning. They are selecting the target market, evaluating investments, creating relationships, assembling the team, and submitting Letters of Intent (LOI). Once they sign the Purchase and Sale Agreement (PSA), the deal is ready for takeoff. At this stage the GP team is on the runway ready for takeoff and committed.
Takeoff
Once the deal closes the plane is on takeoff. And once the plane is in the air there is no going back. This is the reason why lenders look at the experience of the GPs. Has this team taken off and landed before? Can they do it again?
Landing
A normal flight might take a few hours or less, but a multifamily deal usually takes a few years or more. Before takeoff the general partners give you an overview of where they project you to be at the end of that time. It is not until landing or selling the deal that you find out if you reached your destination. If the deal sells and you meet or exceed investment projections, you can conclude that you reached your destination safely. If there are issues mid-flight, then you might get diverted to the nearest airport. You did not reach your destination but at least you did not crash.
Limited Partners
The limited partners are the passengers. They are part-owners of the deal. However, they are not part of the day-to-day operations. They are trusting that the general partners are qualified and experienced enough to get them safely to their destination. In a commercial flight you do not need to vet the pilots because the FAA has regulations and guidelines to ensure safe flight. With multifamily real estate syndications, you will need to do your own due diligence.
Sometimes the LPs get too focused on the investment when they should be focused on the GPs or deal sponsors. If you find a good sponsor you know they will find good deals. Once you find good sponsors then each time you invest your money you have confidence they will reach your desired destination.
More due diligence can be done by asking other passengers or LPs how their previous flight was. Was it a smooth flight that arrived at the projections? Or was it a bumpy flight that had to divert to a different airport. A lot can be learned from asking another LP about a GPs track record.
Conclusion
General Partners are the pilots of a real estate deal and limited partners are the passengers. GPs have a lot of responsibility and get compensated more than the LPs. The LPs do not have the added stress of all the duties the GPs have, but they still need to do their due diligence before taking off. There are new GPs entering the business regularly just like there are new pilots. Everyone starts with no experience. Training with someone qualified or experienced makes for safer flying and investing.
