Limited Partnerships are a way to invest in real estate, without incurring a liability beyond the amount of your investment. However, an investor is still able to enjoy the benefits of appreciation and tax deductions for the total value of the property. LPs also can be used by landlords and developers to buy, build or rehabilitate rental housing projects using other peoples money. If you are seeking passive real estate investments, or have the ability to do a project and are willing to do the work, but need to raise capitol, the concept may be right for you.

Limited Partnerships - The primary purpose of LPs is to limit investor liability to the amount of their investment. But LPs allow the "pass through" of all the property's tax benefits to the investors, and also unlike corporations, their profits are only taxed once. They allow centralization of management, through the general partner. They allow sponsors/developers to maintain control of their projects while raising new equity.

Who makes decisions in a Limited Partnership? The terms of the partnership agreement, governing the on-going relationship, are set jointly by the general and limited partner(s). Once the partnership is established, the general partner makes all day to day operating decisions. Limited partner(s) may only take drastic action if the general partner defaults on the terms of the partnership agreement or is grossly negligent, events that can lead to removal of the general partner.

Who owns what? Ownership interests of the Limited Partnership are split between the limited and general partners according to a negotiated formula. Limited partners can buy up to 99 percent ownership of profits/losses and cash flow (excluding fees to the general partner). The general partner retains the 1 percent or more remaining ownership of profits, losses and cash flow (plus any agreed upon fees).The limited and general partners split any profits from sale or refinance of partnership assets. The split generally provides an incentive to the general partners who may receive up to 50 percent of profits.

The General Partner's Rights: The specific rights of each party are negotiated in the Partnership Agreement. In general, the general partner has the right to make all the day-to-day and development decisions, to determine how much cash to distribute to the limited partner(s) versus how much to hold in reserve, and to assess possible sales proposals.

The General Partner's Obligations: The general partner must complete the project as proposed, must manage the partnership and the business as agreed upon in the partnership agreement. and must, generally, guarantee any additional funding needed to complete the project (repayable with interest) In addition, the general partner oversees construction, leasing. property management. and maintains the books and records of the partnership. It must submit periodic reports to the limited partners(s) on the project?s financial condition and status, including analyses o? the property?s sale potential. The general partner may not withdraw without the approval of the limited partner.

The Limited Partner's Rights - are few: to be informed of operating conditions: to approve a sale or refinancing; and to remove the general partner for gross negligence or breach of contract.

The Limited Partner's Obligations. The limited partner(s) have the obligation to contribute equity in the form of either land and improvements and/or dollars.

General Partner's Fees. The general partner should receive the following fees:

• Developer Fee - for developing the project
• Property management fee - for managing the on-going operations of the project.
• Partner management fee - for managing the operations of the partnership.
• Incentive management fee - structured as up to one third of the cash flow.

Distribution of Cash Among the Partners. There are three ways in which the partnership receives cash which is to be distributed. They are:

• Development financing proceeds.
• General operations and cash flow.
• The sale or refinance of assets.

Real world example. My wife and I shopped at a grocery store in a 100,000 square foot strip center located in a very desirable part of our town. Although the food and a drug store were seemingly doing well, the balance of the center was almost completely vacant and looking very shabby. My expertise was in rental housing, but the shopping center appeared to have all the right things wrong with it, so I set out to buy it.

The shopping center had been heavily leveraged when it was built, with permanent financing arranged through an east coast insurance company. When things got tough, the developers walked, and the insurance company was left holding a badly banged up bag. So ... I offered to help them. They laughed at me.

They did not even know how much their foreclosed property was worth in its present condition, and the were not inclined to worry to much about selling it as long as the two major stores were covering their expenses. What was a really big deal to me, was not worth the time and trouble to them to analyze my offer.

My business partner and I decided to do their work for them and even traveled to their office in Newark to go through their income and expense reports to help us put a fair price on the property. Then we made a honest and fair proposal, backed up with market data and their own numbers. They accepted it, but only as a cash offer.

We just did not have the wherewith all to come up with the $2 million they had agreed to take for the center, so we read up on how the big guys did a deal like ours. A limited partnership seemed to be the answer. So we went to a better off friend, offered to make his Corporation (a local radio station) the General Partner. Then we set out to locate enough Limited Partner investors to raise the necessary capital for new financing and the renovations that would be necessary to attract new tenants.

We bought the center for two million, spent about four hundred thousand on renovations, rented it up, and found a buyer willing to pay us a price for the now good looking center that would double the money of our investors in just over a year.

The General partner refused to sell. He really liked taking credit in the community for turning the shopping center around. (At this point plug in a long, ... long ... pause.)

It finally occurred to us to sell the whole thing to the General partner for the price that the third party had offered. He bought it. Our investors were thrilled with their profits. So were we. And ... we continue to manage the property for him to this day, at 5% of gross.