Updated · Part of the CRE investment glossary
What each side does
In a limited partnership the two roles split the work and the risk. In an LLC the same split appears as the managing member and the non-managing members.
- GP: sources and underwrites the deal, arranges the loan, raises the equity, runs the business plan, sends capital calls and distributions, reports to investors and decides when to sell.
- LP: reviews the offering, signs the subscription agreement, funds its commitment and receives distributions, reports and a K-1. LPs vote only on the matters the agreement reserves to them, such as removing the GP for cause or amending key terms.
- Sponsor: the firm behind the GP. People often say “sponsor” and “GP” interchangeably.
Liability
Under Delaware’s limited partnership act, a limited partner is not liable for the partnership’s obligations unless it is also a general partner or, beyond its rights as a limited partner, participates in the control of the business (6 Del. C. §17-303). A general partner has the liabilities of a partner in a general partnership (§17-403), which is why sponsors form the GP as an LLC rather than act in their own names.
Limited liability for the entity does not remove personal exposure. Sponsor principals often sign a personal guarantee covering the senior loan’s non-recourse carve-outs, and they owe the duties set by the agreement and state law. LPs do not sign the loan; their downside is the capital they invested.
How the economics split
LPs are paid their capital and preferred return first. The GP is paid three ways:
GP economics = fees + promote + pro rata return on the GP’s co-investment
- Fees: for example acquisition, asset management and disposition fees, set in the agreement.
- Promote: the GP’s extra share of profits above the pref, also called carried interest.
- Co-investment: capital the GP invests alongside LPs, paid on the same terms as LP capital.
Worked example: one sale, one waterfall
A deal raises $10,000,000 of equity: $9,500,000 from LPs and $500,000 from the GP (5%). The waterfall returns capital, pays an 8% simple pref, then splits the rest 70% to investors and 30% to the GP as promote, with no catch-up. The property sells in year five and distributes $18,000,000 in total; there were no earlier distributions. Fees are left out.
LPs receive $15,960,000, 1.68x their $9,500,000. The GP receives $840,000 on its co-investment plus a $1,200,000 promote, $2,040,000 in total: 4.08x its $500,000. Of the $8,000,000 profit, LPs keep 80.75% and the GP 19.25%.
| Tier | Total | LPs (95%) | GP co-invest (5%) | GP promote |
|---|---|---|---|---|
| Return of capital | $10,000,000 | $9,500,000 | $500,000 | — |
| 8% pref, 5 years | $4,000,000 | $3,800,000 | $200,000 | — |
| Remainder, 70/30 | $4,000,000 | $2,660,000 | $140,000 | $1,200,000 |
| Total | $18,000,000 | $15,960,000 | $840,000 | $1,200,000 |
What LPs check about a GP
Because LPs give up control, the agreement is their protection. Before investing they commonly look at:
- How much the GP co-invests, and whether it is cash or deferred fees.
- Every fee, what it is charged on, and whether fees reduce the GP’s promote.
- The pref, catch-up and promote tiers, and whether the waterfall is deal by deal or whole fund.
- Removal rights: what counts as cause, and what vote it takes.
- Reporting: how often, what is in it, and when K-1s arrive.
Primary sources
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.