What is a limited real estate partnership (RELP)?
A real estate limited partnership (RELP) is a group of investors who pool their money to invest in the purchase, development, or lease of property. 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 responsibility 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 company. Limited partners are outside investors who provide financing in exchange for a return on investment.
Under the US tax code, companies are not subject to tax. Rather, the associations make a so-called transfer, sending all their income to the members and reporting on the K-1 form. Partners who receive 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 (RELP) are LPs organized to invest primarily in real estate.
- The limited partners are generally independent investors, while the general manager assumes the day-to-day responsibilities.
- RELPs can offer high returns, with corresponding high risks.
- RELPs can provide certain tax benefits as they transfer income to individual partners.
Understanding Real Estate Limited Partnerships (RELP)
A RELP gives people the opportunity to invest in a diversified portfolio of real estate investments. RELPs are just one of several options available to those seeking real estate investment exposure. They also include real estate investment trusts (REITs), managed investment funds focused on real estate, and other real estate portfolio options. An RELP can provide returns that outperform other options, while also carrying comparatively higher risk.
Depending on the structure of the LP, the partners may or may not participate in the management of the business. The partnership agreements detail all the provisions of the business, including minimum investments, fees, distributions, partner voting, and more. Some associations employ a type of collaborative forum structure for investment decisions, while others leave central business management to a few executives. Generally, the management team looks for and identifies deals before investing part of the group’s capital.
RELPs are traded with detailed partnership agreements that define the terms of the entity and the overall investment opportunity. They are typically aimed at institutional investors and high net worth individuals. Some require accredited investor status for limited partnership status.
Many RELPs have a strictly defined focus: they can provide the commercial structure for the construction of a residential neighborhood, a shopping center, or a shopping plaza. They often specialize in a real estate niche such as high-value commercial properties or retiree developments. Some real estate investment companies accept investments of $ 5,000 to $ 50,000. That is not enough to buy a unit, but the partnership will pool money from multiple investors to finance a property that is shared and co-owned.
RELPs can have high returns and high risks, making due diligence important to potential investors. The terms of the agreement may require the limited partner to commit to a lump sum contribution, a schedule of contributions over time, or contributions as requested.
In particular, the funds invested in a limited company are often illiquid. The investor cannot withdraw money at any time.
There may be flexibility for various business activities within the portfolio. A RELP could invest directly in real estate, issue credit to real estate borrowers, or participate in a collaborative business agreement.
Roles of partners in a RELP
The general partner generally has a vested interest in the partnership at large and provides a portion of the capital. General partners have a direct role in the management of the company and appointees often serve on the board of directors and participate in the day-to-day management of the company. Generally, general partners have active decision-making authority.
LPs have limited liability and generally have limited influence and involvement in the governance of the entity. Some entities establish advisory boards or other means of communication to promote understanding and participation of limited partners. Generally, limited partners are independent investors.
Limited partners receive dividend distributions along with transfer income annually, which is part of their performance. Many limited partnerships have a fixed-term useful life so that the partners receive their capital on a specific expiration date.
Taxes and RELP
As with any partnership, a RELP is not required to pay taxes. Net income or losses are transferred to partners annually.
This requires the partnership to file a Form 1065 informational return with the Internal Revenue Service and to report all income distributions through individual K-1 partners. All business partners receive year-round distributions and an annual income distribution.
RELP is responsible for providing each member with a K-1 detailing the income they have received during the year. Members must then report their income individually as appropriate.
RELPs do not pay taxes directly. Net income or losses are passed on to investors, who are responsible for tax filing.