Partner's Outside Basis Change After Payback

[Daniel G.]

Hi, I'll do my best to make my question as simple as possible to understand. 

Suppose that a sponsor raises capital for a multifamily property acquisition between himself (General partner) and other limited partners. The initial equity split is 80/20 meaning that 80% of the equity capital needed was paid for by the limited partners and the sponsor put in the remaining 20% of capital.

In years 1-4 the sponsor paid all members an 8% preferred rate of return and in year 5 paid back all of their principal through a liquidation event. Following this the equity split changes from 80/20 to 50/50 due to a clause on the operating agreement everyone signed.

My question is how exactly is the sponsor able to do this? Mathematically speaking all of the limited partner's outside basis (80% interest) would have to be multiplied by .63 to compress to 50%. The sponsor's basis or interest on the other hand would be 2.5X his initial interest.

How the heck does this logically work? How does the sponsor reduce the LP's previous equity position?