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Updated almost 8 years ago, 01/20/2017
First Multi-Family Investor Questions
As a broker offered (we think) a good opportunity, our family is thinking of investing in multi-family apartment building in Virginia as a LP . I learned only in books while I took commercial real estate class at a law school a few years ago, so I do not know much. So, I have a couple of questions:
- Is is common to have a limited partnership structure for a multi-unit property after construction phase? The property is fully leased up, and a current LP (a closed end fund) is leaving as the term of the fund is about to expire.
- If the limited partnership owns the property, what does the ownership structure look like? Is the title under the name of GP?
- The property is going to be leveraged, and what does the typical commercial real estate loan look like? Full amortization or partial?
- What protections does a LP have against a GP's misconduct? I know it is a matter of the partnership agreement that dictates the relationship between a GP and a LP(s), but just conventional terms would help me understand (or a model partnership agreement.)
- What is a typical exit plan of a LP?
Any comments would be greatly appreciated. Thanks!
I have invested and reviewed apartment deals that are structured as follows:
- The property is owned by an LLC
- The LLC is comprised of a Manager (class B units) and Members (class A units)
- The Manager is another entity (LLC) or a single person
- The Manager is responsible for most of the decision-making and day-to-day operations.
- The Members have limited voting power to vote on few important events such as sale of the property.
- The Members contribute all equity capital. The Manager may also hold Member's interest in the LLC. Personally, I would not invest in a deal where a sponsor (Manager) does not invest their own money.
- The Manager can be removed and replaced under certain circumstances. E.g., in case of criminal misconduct, fraud, or similar situations. Usually one of the loan guarantors become the Manager in these cases. All of it is highly dependent on the deal sponsor (Manager) and his desire to give additional protections to the members.
- The Manager receives compensation in form of profit share and asset management fee (% of gross receipts). There may also be acquisition, disposition, refinance, construction management, and whatever other fees. They are all deal- and person-specific.
- The property is leveraged with 75-80% LTC commercial loan amortized over 25-30 years with 5-10 years balloon.
- The typical exit strategy is selling the property. There is also a possibility of a "half-way" exit via refinance. In this case investors (Members) continue to own their share of the LLC and receive dividents even though most or all of their money may have been returned to them.
Hope this helps
Nick