Pooling Private Finance For Partnership Profits
Have you ever wondered how property moguls and private companies raise the tens or even hundreds of millions to fund projects that earn billions of dollars for them in return? In Mid-Town Manhattan, the Las Vegas Strip, along Collins Avenue in Miami and even here in San Diego real estate lawyers routinely draw up contracts that bring together investors and developers for projects that would otherwise be beyond the reach of all but the wealthiest among us.
Limited partnerships provide a financial alternative to banks and the stock market. Together, partners can attempt much larger projects than any of them can try alone. A trusted general partner takes the leadership role; the investors remain in the background as silent limited partners. The general partner earns a fee and makes all decisions regarding investments and operating decisions. Limited partners have no real responsibility and their main right is a proportionate share of the income.
It is not only real estate that takes advantage of this powerful tool, any group of investors can pool equity by creating a type of partnership called a syndicate. There are two typical forms of syndicates; if you are interested you should speak to an attorney to determine the right form for you. Family, friends and high wealth individuals are a good source of investment syndication for real estate projects and to fund new business startups.
Private Equity Funds And Real Estate Investment Trusts
Private equity funds are giant syndicates that collect funds not just for one deal but many multiples of deals. Usually organized with a general partner as manager and limited partners organized in blind pools; perhaps even more so than a single project partnership the limited partners must trust the general partner has a flow of deals, good judgment and the discipline required to keep it going.
Limited partnership in real estate can qualify for special tax treatment if the syndicate is large enough. These are known as a real estate investment trusts or REITs. The income from REITs is not taxed as corporate income but you must distribute at least 90% of the profits to shareholders, which can limit share growth. It must be a broadly held real estate asset with at least one hundred shareholders, of whom, no five or fewer can hold a majority of shares.
Limited partnerships are powerful tools with which to build wealth. When you form a limited partnership you do need to ensure that you have the right legal advice and that the contract does contain all of the clauses that suit your objective and that it doesn’t have any trap doors that could lead to trouble down the road. Limited partnerships must be built on trust to be successful.
As a business founder or a real estate investor it is worth keeping in mind the potential of limited partnerships to leverage your enterprise and investments. It is the responsibility of the general partner to manage the fund and limited partners sit back and take a passive role as investors.