Should a Property Joint Venture Use an LLC or a Limited Partnership?

Most property joint ventures are formed as an LLC, and a limited partnership is used in some circumstances. Distribution economics come from the agreement and read the same in either form. Liability and authority depend on entity form, applicable law and the agreement. An LP typically assigns management to the general partner, while an LLC operating agreement sets management roles.

What the investor owns: an entity interest, with the building one layer down

An investor in a syndication or joint venture owns an interest in an LLC or a limited partnership. The investor does not own the real estate directly. The entity holds title and signs the loan, and the investor’s rights are whatever the entity agreement grants.

A joint venture is typically formed as an LLC, with a limited partnership used in certain circumstances. A single-purpose entity of either type commonly owns the property, and the sponsor works under an operating agreement with that entity to hire contractors and put the financing together.

Fund descriptions add a layer. When investors commit to a limited partnership managed by a sponsor acting as general partner, the commitment sits at the fund. The entity named on the deed is a separate question, and the reading of any structure runs layer by layer down to that entity.

“A joint venture is typically formed as a limited liability company, or in certain circumstances, a limited partnership, between the parties to jointly own, develop, finance and operate the project.”

Where authority and liability sit in each form

A limited partnership has two classes of interest with built-in roles. The general partner typically manages the business and may face liability for partnership obligations. Limited partners generally have liability protection, subject to applicable law and their own obligations.

An LLC carries no built-in split of that kind. The sponsor’s job of finding the deal and executing the business plan is written into the operating agreement, which sets the manager’s authority and the terms for approvals and removal, subject to applicable law.

The identity of the general partner matters in an LP because that party may face recourse for partnership obligations. Its entity form and capitalization can affect that exposure. In an LLC, liability protection depends on applicable law and any separate obligations undertaken by members or managers.

How a lender’s principal test reads an LP borrower

Lenders look through a borrower entity to the people behind it. One agency multifamily program identifies as principals the general partners and any limited partners holding at least 25 percent of a limited partnership borrower.

Under that program, a capital partner holding a 25 percent limited partner interest meets the ownership threshold even with no management role. A lower percentage falls below that ownership threshold, although other principal criteria may apply.

Control and economics can diverge in the general partner role

The general partner role carries control and does not require a matching economic stake. In a typical UPREIT, a listed REIT serves as or controls the operating partnership’s general partner and owns the properties indirectly through that partnership.

One large apartment REIT is the general partner and 97 percent owner of its operating partnership. The remaining economics sit with other limited partners, who hold no control.

A general partner’s duties to the partnership and its limited partners vary with applicable law and the partnership agreement. Those duties can conflict with the duties the same party owes to its own stockholders. A sponsor general partner in a smaller joint venture faces the same structural tension between its own interests and those of the limited partners, which is why conflict and removal terms carry weight in the agreement.

Mistakes that blur entity form, role labels and liability

Treating general partner and limited partner labels as proof of a limited partnership misreads the entity. A fund can be a Delaware LLC and still describe its participants as a general partner and limited partners. The label describes a role, and the entity type comes from the formation documents.

Describing the whole venture as having limited liability overlooks differences between partner roles. A general partner may face liability for partnership obligations, while limited partners generally have liability protection, subject to applicable law and their own obligations.

Reading a fund-level limited partner position as the property-level vehicle skips a layer. A commitment to a fund gives an interest in the fund, and a separate entity may hold title. The ownership analysis has to follow the interest down to the entity named on the deed.

A lender’s ownership threshold can apply to passive partners. Under one agency program, limited partners holding at least 25 percent are identified as principals even without a management role.

Assuming a general partner holds a small stake overlooks that control and economics separate. One large apartment REIT holds 97 percent of its operating partnership while serving as general partner. Management authority and ownership percentage are separate features of the structure.

Features that separate an LLC venture from an LP venture

The entity holding title locates the asset in the ownership structure. The loan documents identify the borrower.

The formation documents identify whether the vehicle is an LLC or a limited partnership. Participant labels alone can be ambiguous.

In an LP, the general partner’s identity, entity form and capitalization can affect exposure to partnership obligations.

In an LLC, the operating agreement sets approval rights for major decisions and the terms for removing the manager, subject to applicable law.

Each partner’s ownership percentage affects whether a lender’s principal threshold applies. A limited partner at 25 percent or more can be identified under one agency program.

A sponsor’s own interests can conflict with those of the limited partners. A general partner’s duties depend on applicable law and the partnership agreement.

The agreement sets the distribution formula in either entity form. Entity choice alone does not determine how partners share distributions.