Sponsors are often on the hunt for innovative ways to fund their real estate projects, particularly when they find themselves under capital constraints that limit their ability to invest. Some sponsors turn to general partner (GP) funds to meet their capital contribution obligations while maintaining the freedom to invest in additional projects.Typical StructureA typical real estate project is structured as a limited liability company (LLC) or limited partnership (LP) with the sponsor serving as the general partner. In addition to managing the daily operations of the project, the sponsor is expected to make a substantial capital contribution and raise capital from other sources. In exchange for doing so much of the heavy lifting, the sponsor receives a disproportionate share of the profits (that is, more than its capital contribution percentage) commonly known as the “promote”.Often sponsors participate in multiple projects. Because they don’t receive promote distributions until the later stages of a project, some sponsors might not have the necessary capital to participate in all of these projects. That’s where a GP fund can come in handy.To start, the sponsor forms a joint venture equity fund to raise sufficient capital to cover its investment requirements giving investors the opportunity to participate in the GP project and share in the sponsor’s promote distributions. The fund could raise additional capital through a private offering and then use the proceeds to make the requisite GP investment in several projects.Of course, the sponsor might run into some resistance. For example, limited partners in the underlying project might worry that the sponsor will lose the incentive to run the project efficiently and minimize risks when it has less of a financial interest at stake in the project. However, the sponsor’s compensation remains closely tied to the project’s performance and the sponsor risks reputational damage that could hurt its odds of raising funds in the future.Important ProvisionsThese arrangements aren’t to be entered into lightly, though. If you’re thinking about starting a GP fund, consider the following:
Proceed with CautionDone right, GP funds can serve as valuable investment vehicles for both sponsors and investors. The arrangements generally are complicated, though, so if you have any questions please reach out to your Elliott Davis advisor.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.