What Is a Real Estate Limited Partnership (RELP)?
A real estate limited partnership (RELP) is a group of investors who pool their money to invest in property purchasing, development, or leasing. It is one of several forms of real estate investment group (REIG). Under its limited partnership (LP) status, a RELP has a general partner who assumes full liability and one or more limited partners who are liable only up to the amount they contribute.
The general partner is usually a corporation, an experienced property manager, or a real estate development firm. The limited partners are outside investors who provide financing in exchange for an investment return.
Under U.S. tax code, partnerships are not taxed. Rather, partnerships do a so-called pass-through, sending all of their income to the partners and reporting on form K-1. Partners receiving a K-1 must individually file their partnership income on Form 1040 if they are an individual or on Form 1120 if they are a corporation.
- Real estate limited partnerships (RELPs) are LPs organized to invest primarily in real estate.
- Limited partners are generally hands-off investors while the general manager takes on day-to-day responsibilities.
- RELPs can offer high returns, with correspondingly high risks.
- RELPs may provide certain tax benefits, as they pass income through to individual partners.
Understanding Real Estate Limited Partnerships (RELPs)
A RELP provides individuals with the opportunity to invest in a diversified portfolio of real estate investments. RELPs are but one of several options available to those looking for real estate investment exposure. They also include real estate investment trusts (REITs), managed real estate-focused investment funds, and other real estate portfolio options. A RELP may provide returns that beat other options, while simultaneously carrying comparably higher risk.
Depending on the structure of the LP, partners may or may not be involved in the management of the business. Partnership agreements detail the full provisions of the business, including minimum investments, fees, distributions, partner voting, and more. Some partnerships employ a collaborative-forum type of structure for investment decisions, while others leave the core management of the business to a few executives. Generally, the management team sources and identifies deals before investing any of the group's capital.
RELPs are marketed with detailed partnership agreements that define the terms of the entity and the investment opportunity overall. They generally target high-net-worth individuals and institutional investors. Some require accredited investor status for limited partnership status.
Many RELPs have a narrowly defined focus: they may provide the business structure for construction of a residential neighborhood, a shopping center, or a business plaza. They often specialize in a real estate niche like retirement developments or high-value commercial properties. Some real estate investment partnerships accept investments of $5,000 to $50,000. That's not enough to purchase a unit, but the partnership will pool money from several investors to fund a property that is shared and co-owned
RELPs may have high returns and high risks, making due diligence important for prospective investors. The terms of the agreement may require the limited partner to commit to a lump sum contribution, a contribution schedule over time, or to contributions as called upon.
Notably, funds invested in a limited partnership are usually illiquid. The investor can't cash out at any time.
There may be flexibility for various business activities within the portfolio. A RELP might directly invest in real estate properties, issue credit for real estate borrowers, or participate in a collaborative business deal.
Partners' Roles in a RELP
The general partner usually has a vested interest in the partnership overall and provides a portion of the capital. General partners have a direct role in the management of the business with designees often serving on the board of directors and involved in the day-to-day management of the business. Overall, general partners hold active decision-making authority.
LPs have limited liability, and it usually comes with limited influence and involvement in the entity’s governance. Some entities set up advisory boards or other means of communication to encourage the insights and participation of limited partners. Generally, limited partners are hands-off investors.
Limited partners receive dividend distributions along with pass-through income annually which constitutes part of their return. Many limited partnerships have a fixed-term lifespan so that partners receive their principal at a specified maturity date.
Taxes and RELPs
As with any partnership, a RELP is not required to pay taxes. The net income or losses are passed through to the partners annually.
This requires the partnership to file a Form 1065 informational return with the Internal Revenue Service and to report all distributions of income through individual partner K-1s. All of the partners in the business receive distributions throughout the year and a distribution of income annually.
The RELP is responsible for providing each partner with a K-1 which details the income they have received for the year. Partners are then required to report their income individually as appropriate.
RELPs do not pay taxes directly. Net income or losses are passed along to investors, who are responsible for tax reporting.