Responsibilities of a Limited Partner in a syndication

[David Fernandez]

We usually invest our idle money as a private lender. We get the negotiated interest rate on the money we lend. We don’t participate on the upside, but we don’t have to do anything else after we lend the money.  

I’ve been looking at syndications and I’m wondering what are the cons of this type of investment. I understand the preferred return, splits, and other related return/income points; however, I’m wondering if there is anything else to do while being a limited partner or what a limited partner may be liable for. Are we on the hook for anything if the project doesn’t succeed? Are we liable for anything that happen in the property?  

In short, what are the differences between a private lender and a limited partner?

[Alina Trigub]

@David Fernandez

You've received a lot of helpful feedback here already. As a former tax accountant and someone who has invested in syndications as limited partner in the past, I suggest considering the tax consequences. When you act as a private lender you're receiving ordinary income taxed at your current tax rate. By investing as a passive investor in a syndication you're eligible for the tax benefits of the partnerships via K-1's. Most partnerships will most likely plan to show lower paper income than actual. Granted this income will be recaptured through depreciation at the time of sale. However until the same you'll be receiving tax benefits.  Also if you become an active equity partner, there're tax benefits that may potentially lead to utilizing "active real estate investor" status. This is FYI only. Please consult your tax adviser for further details.

If you'd like to discuss this further feel free to reach out directly.

Best of luck!