Episode 27: GP VS. LP Economics – Who Gets Paid What & When

Welcome to Building Passive Income, the podcast for professionals, entrepreneurs and investors who want to build wealth, diversify beyond Wall street, and create true financial freedom through passive commercial real estate investing. I'm Wayne Courageous III, founding and managing principal of Crei Partners, a leading commercial real estate company, I created CreiColin, an AI powered resource to serve as your investor education guide. Built on the insights and experience we've developed at CREI Partners, Creicollen is here to educate you through passive invest tax strategy topics to help your journey in passive investing. Just a quick disclaimer. This podcast and CRA Colin is for educational purposes only and is not legal tax or investment advice. Always consult with your attorney, CPA and financial advisor before making any investment decisions. I've spent nearly two decades helping investors understand the power of commercial real estate, from multifamily to storage to retail. Each episode is under 15 minutes, simple to follow and and packed with insights to help you grow your income and protect your capital without becoming a landlord. If you're ready to learn quickly and invest smarter, you're in the right place. Welcome to Building Passive Income. Let's build wealth together. Here's creicollen.

Here's a question I hear all the if I'm putting up 95% of the money, why does the GP get 20 or 30% of the profits? It's a fair question. On the surface, it seems like the economics are skewed heavily in the sponsor's favor. But here's the reality. The GP and LP play fundamentally different roles in a syndication, and the economics reflect those differences. The LP provides the capital, the GP provides the expertise, the the deal flow, the relationships, the execution and the liability. Understanding GP versus LP economics isn't just about knowing who gets paid what. It's about understanding alignment, risk, and whether the sponsor's compensation is justified by the value they're creating. I'm Crei Collin and this is Building Passive Income, where we give you the strategies to build real wealth through passive real estate investing. Today we're breaking down GP versus LP economics. You'll learn what each party contributes, how compensation is structured, what drives the profit split, and how to evaluate whether a deal's economics are fair and aligned. Let's dive in. What does the GP contribute? The general partner is the sponsor, the team that sources the deal, secures the financing, manages the property, executes the business plan and ultimately sells the asset. Here's what the GP brings to the deal. Sourcing and underwriting the GP spends months or even years building relationships with brokers, owners and lenders to get access to off market and on market deals. They analyze dozens or hundreds of deals to find one that meets their investment criteria. They conduct financial underwriting, market research and risk analysis to determine whether a deal is viable. Capital Raising the GP raises the equity from limited partners. This involves marketing, investor relationships, legal compliance and due diligence on investors. Securing Financing the GP negotiates with lenders to secure debt financing. This includes providing personal guarantees, meeting net worth and liquidity requirements, and managing the lender relationship throughout the hold period. Acquisition and Due Diligence the GP manages the acquisition process including inspections, environmental reports, surveys, title work and closing. They identify and mitigate risks before the deal closes. Asset Management and Operations the GP oversees property management, approves budgets, monitors performance and makes strategic decisions throughout the hold period. They handle leasing, renovations, tenant relations and compliance. The GP manages the sale process including marketing the property, negotiating with buyers and closing the transaction. Liability and Risk the GP is personally liable for the deal if something goes wrong, if the property underperforms, if there's a lawsuit, if the lender calls the loan, the GP's personal net worth is on the line. The LP, by contrast, has limited liability. Your risk is limited to your capital contribution. Your Action Step when evaluating a sponsor, ask yourself what value is the GP bringing beyond just finding the deal? Do they have the experience, systems and track record to execute? What does the LP contribute? The limited partner is the passive investor. You provide the capital that makes the deal possible, but you're not involved in day to day operations or decision making. Here's what the LP brings to the equity Capital the LP provides the equity needed to close the deal. This is the down payment that, combined with debt financing, allows the GP to acquire the property. Without LP capital, the deal doesn't happen. Passive role the LP is not involved in operations, management or decision making. You're truly passive, which is both a benefit and a limitation. You have no control. Limited Liability As a limited partner, your liability is limited to your capital contribution. You're not personally liable for the property's debts or obligations assuming you remain passive and do not provide personal guarantees. Tax benefits the LP receives their proportionate share of the tax benefits, including depreciation and passive losses which which can offset other passive income. Your Action Step Understand that as an lp, your role is to provide capital and trust the GP to execute. Your power lies in your due diligence before you invest, not in your control during the hold period. How GP Compensation is Structured GP compensation comes from multiple sources and understanding each one is key to evaluating whether the economics are fair. Here are the primary ways a GP gets Acquisition Fee the GP charges a one time fee at closing, typically 1 to 3% of the purchase price. This fee compensates the GP for the work involved in sourcing, underwriting and closing the deal. For example, on a $10 million acquisition, a 2% acquisition fee is $200,000. Asset management fee the GP charges an ongoing fee during the hold period and typically 1 to 2% of collected revenues or net operating income. This fee compensates the GP for overseeing property management, monitoring performance and handling investor relations. For example, if a property generates $1 million in annual revenue and the asset management fee is 1.5%, the GP receives $15,000 per year. Refinance Fee if the property is refinanced during the hold period, the GP may charge a refinance fee to typically 1% of the new loan amount. This fee compensates the GP for the work involved in securing the new financing. Disposition Fee when the property is sold, the GP charges a disposition fee, typically 1% to 2% of the sale price. This fee compensates the GP for managing the sale process. For example, on a $15 million sale, a 1.5% disposition fee is $225,000. Promote carried interest the promote is the GP's share of profits above a certain return threshold, typically after the LP receives their preferred return and return of capital. This is where the bulk of the GP's upside comes from in a successful deal. For example, in a 70:30 split, the GP receives 30% of profits after the LP's preferred return and capital are returned. GP CO investment Many GPs co invest their own capital into the deal, typically 5% to 10% of the total equity raise. This aligns the GP's interests with the LPs because the GP's personal capital is at risk. Your Action Step when reviewing a deal, add up all the GP's fees and promote. Ask yourself, is the total compensation reasonable given the value the GP is creating? Section 4 Understanding the promote Carried Interest the promote is the most important and often the most misunderstood component of GP compensation. Here's how it works. The promote is the GP's share of profits after the LP receives their preferred return and in many structures their return of capital. The promote is typically expressed as a percentage such as 20%, 25% or 30%. In a 70:30 deal, the LP receives 70% of profits and the GP receives 30%, even though the LP provided the vast majority of the capital. Here's why this structure makes sense. The LP's capital is senior to the GP's promote, the LP gets paid first. The GP only profits if the deal performs. If the property underperforms and doesn't generate returns above the preferred return, the GP's promote is zero. The promote aligns the GP's compensation with performance. The better the deal performs, the more the GP earns but only after the LP's return thresholds are met. Lets look at an example. L.P. invests $3 million GP Co invests $150,000 5% of equity preferred return 8% cumulative profit split after pref and return of 7030 LPGP at the sale. Net proceeds after debt payoff are $5 million. Tier 1 L.P. receives accrued preferred return of $600,000 Tier 2 L.P. receives return of capital of $3 million remaining proceeds $1.4 million Tier 3 GP catches up to their 30% promote. Tier 4 remaining profit split 7030 L.P. receives $980,000 70% of $1.4 million GP receives $420,000 30% of $1.4 million total L.P. 3 $3 million plus $600,000 plus $980,000 equals $4.58 million on a $3 million investment equals 1.53 times equity multiple total GP return on their $150,000 CO investment $150,000 capital back plus their share of pref and profits plus the GP earned fees throughout the deal Acquisition fee, asset management fees and disposition fee. Your Action Step when evaluating a deal's promote structure, ask does the LP get their preferred return and capital back before the GP takes promote? If yes, the structure is likely fair. Evaluating whether GP compensation is fair so how do you know if a GP's compensation is reasonable? Here are the key questions to ask. Are the fees in line with market standards? Typical acquisition fee 1% to 3% asset management fee 1% to 2% of revenues disposition fee 1% to 2% of sale price if the fees are significantly higher, ask why is the GP co investing? A GP who co invests their own capital into the deal is signaling alignment. They're putting their money where their mouth is. If the GP isn't co investing, ask why. It's not automatically a red flag, but it's worth understanding their reasoning. What is the promote structure? A 70, 30 or 8020 split is standard. A 6040 split is GP heavy and should be justified by exceptional value creation or higher risk. Does the LP get paid first? The LP should receive their preferred return and ideally their return of capital before the GP takes promote is the preferred Return Cumulative A cumulative preferred return protects your downside and ensures the GP only profits if you receive your full expected return. What is the GP's track record? A GP with a strong track record of delivering on projections and creating value deserves to be compensated well. A first time sponsor with no track record should have more conservative compensation. Is the total compensation reasonable? Add up the fees and the projected promote. Ask yourself if the deal performs as projected, what is the GP's total compensation as a percentage of the profits? Is that reasonable given the value they're creating? Your Action step Don't evaluate GP compensation in isolation. Compare it to other deals, other sponsors and the value the GP is bringing. A great sponsor who delivers strong returns is worth paying well Red Flags in GP versus LP Economics Here are some red flags to watch for when evaluating GP versus LP economics. Excessive Fees if the GP is charging fees at the high end of the range or above the range on multiple fronts, it can indicate that they're prioritizing fee income over over alignment. For example, 3% acquisition fee plus 2.5% asset management fee plus 2% disposition fee plus 30% promote equals the GP is making a lot of money regardless of whether the deal performs. No GP Co Investment if the GP isn't co investing any of their own capital, it raises questions about alignment. Why aren't they willing to put their own money into the deal? LP Unfriendly Waterfall if the waterfall allows the GP to take promote before the LP receives their preferred return or return of capital, that's a red flag. Non Cumulative Preferred Return A non cumulative preferred return is less protective and allows the GP to take promote even if you haven't received your full expected return. Unclear or Vague Fee Disclosures if the PPM doesn't clearly disclose all fees or if the fee language is vague, that's a red flag. A great sponsor is transparent about how they get paid fees paid to related parties. If the GP is paying fees to related entities they control, such as a property management company, construction company or brokerage, those fees should be clearly disclosed and at or below market rates. Your Action step if you encounter any of these red flags, ask the sponsor to explain. A great sponsor will be transparent and willing to address your concerns. A poor sponsor will be defensive or evasive. Recap and Action Steps alright, let's recap. GP vs. LP Economics define who gets paid what, when and how much and understanding these economics is critical to evaluating whether a deal is fair and aligned. Here's what you need to 1. The GP contributes Deal sourcing Underwriting Financing asset management, execution and and personal liability. The LP contributes capital and has a passive limited liability role. 2. GP compensation comes from acquisition fees, asset management fees, disposition fees, refinance fees, promote and GP Co investment. 3. The promote is the GP's share of profits after the LP receives their preferred return and return of capital. It aligns the GP's compensation with performance.

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To evaluate whether GP compensation is fair, ask Are the fees in line with market standards? Is the GP co Investing? Does the LP get paid first? Is the promote structure reasonable? 5. Red flags include excessive fees, no GP Co investment, LP unfriendly waterfalls, non cumulative preferred returns, and vague fee disclosures. Here's your action step. Pull out the PPM from one of your current syndication investments. Find the sections on fees and promote Add up the total GP compensation. Ask yourself, is this reasonable given the value the GP is creating? If you're ready to build a diversified syndication portfolio with sponsors who prioritize alignment and transparent economics, let's talk. Check the show notes for a link to Schedule a call with us@creipartners.com next week on Building Passive Income, we're diving into sponsor compensation, explained fees, promotes and alignment. Until then, remember, financial freedom isn't a dream, it's a decision. And it starts with understanding who gets paid what and when. I'm Crei Collin. Let's Build wealth together thanks for tuning

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Sam.