To understand what a real estate syndication is, you have to know the difference between a general partner and a limited partner.
What Is the Difference Between a General Partner and a Limited Partner?
Make sure you download ALL my resources for FREE at this link: https://themichaelblank.com/vault
There are some key differences between these two things that investors must know.
General partners are the people that put the deal together. They're also also called the syndicators. They go out, they find the deal, they underwrite the deal, they visit the site to assess and make sure it looks good. The general partners put everything together; they manage the asset. And essentially, they hold all of the control.
Limited partners get to benefit from the general partners. In essence, they ride their coattails. Limited partners do not have to put in their time and energy into overseeing the asset. The name limited partner revolves around the limited liability they have.
Limited partners have significantly less or no liability in these investments.
It's important to note that these names historically come from a time when investments in buildings were done in the legal structure of partnerships. Nowadays, we do do them inside an LLC. Technically, and legally, they're not limited partners, and general partners. We speak of it that way, just to delineate people on the operating side, or the GP side, from those on the passive, or LP side.
One of the reasons we still use this language is it's so helpful to understand the liability between the limited partner who has limited liability, and the general partner that has general liability.
What are the key differences between the amount of liabilities possessed by the general partners as opposed to limited partners?
The limited partners' liability is usually limited to what they've invested.
If you brought $100,000 into a deal, the worst that can happen to you is, you lose that $100,000. That's unlikely, but it could happen.
The general partners, who put the deal together, take on even more risk in order to give the benefit of the investment to the limited partners.
The GPS will sometimes personally guarantee the debt on the asset. For example, you buy a $10 million apartment building, and there's $8 million of debt on it. If the investment itself doesn't go well, the GPs are personally responsible for that debt. Clearly, the GPS take on significantly more liability in order to give you an investment opportunity.
For the LPS, a worst case scenario is they lose their investment, but the GPs have in a sense, unlimited exposure on that deal.
