PPM Company Formation: Your Role As A Limited Partner

We’ve almost covered the entire PPM.

In this last section, you’ll learn how to manage your expectations and responsibilities as a Limited Partner in the deal.

Since it’s your money on the line, this is the final piece of the puzzle to properly understand your role as a passive investor.

When you receive the PPM, you’ll also get access to the Limited Partnership Agreement.

The PPM often contains a summary of this agreement, which we’ll explain below.

It goes without saying that you should read the Limited Partnership Agreement in full. But the summary included in the PPM will give you the most important points. Plus it’s easy to come back and scan if you need to review anything quickly.

And if your particular PPM doesn’t have a summary, then the points below will show you what to focus on.

Let’s get to it…

Summary Of The Limited Partnership Agreement

The general partners typically form a limited partnership company to partake in the acquisition, operations, and disposition of the property.

The agreement for this company will contain a lot of required legal definitions, like any contract. Once you wade through those, you get to the meat.

Here are some of the main points to consider:


This will tell you the interest classes within the partnership, and who is expected to provide what.

In theory, there could be infinite classes, and each class would have a unique definition (typically involving contributions and services at different levels).

One common way to define interests is to say that there is a class that just provides capital, and another class that provides capital and services. You could call the capital-only class “Class A”, and the capital+services class “Class B”. Or the other way around; it doesn’t matter, because each agreement will define its own classes.

If a class includes provision of services, that would be the class for the GPs to participate in (since the LPs are only expected to provide capital).

GPs usually put some skin in the game by investing personal cash in their own deals, so the class for capital+services is the class they would own.

The capital contributions are made in total at the beginning, and are kept in a capital account by the General Partners.

Rights and Duties of General Partner

This clearly explains what the GP is expected to do in the deal.

As you may imagine, that includes managing all the company affairs, as well as having authority over the property to achieve the business plan.

In contrast, the LPs are to remain strictly passive.

General Partner Removal

This worst-case scenario will be defined.

There are commonly two ways a GP can be removed from the company:

  • they willingly resign with X days notice to the LPs
  • they are forcibly removed for “Good Cause” by a vote of a certain percent of LPs

The days of notice, the percentage of votes required, and the definition of Good Cause will be provided in the agreement.

Accounting Policies

This will tell you how the financial records will be handled. It will also define the company’s fiscal year.

As a Limited Partner, you will have access to the records, and the agreement will define how to make a reasonable request to see them. It will also mention how long you can expect the records to be maintained after the term of the company.

There will typically be a mention of how the GP will keep the LP contact information confidential.

That’s standard operating procedure, but you should still check that it appears somewhere.

Disassociation of a Limited Partner

The agreement will define the conditions under which an LP can be removed from the company.

This is also very rare.

Typical conditions would be if an LP was engaged in purposeful conduct to hurt the company, or if it was otherwise unlawful for the LP to continue being a partner.

Generally, as an LP, you can’t willfully leave the company unless you meet very specific transfer provisions outlined in the agreement.

In other words, you should plan on being a part of the company during the property hold period.

Internal Dispute Resolution

More worst-case scenarios.

If there is a dispute between the LP and the GPs, the agreement will define how everyone is affected (including other LPs not involved in the dispute). It will also define the limits of what can be sought by a disputing party.

It goes without saying that you should seek your own legal counsel to look over the PPM and agreement.

Generally there will be a plan for negotiation and arbitration in case of disputes, and all parties will give up their rights to a jury trial.

Termination of the Company

The agreement will describe the distribution of company assets upon termination.

This usually includes provisions for debts and other liabilities, as well as payouts to all the partners involved.

The company is only terminated by the sale of the property (most common), or by a vote of majority interests to dissolve.

Profits / Losses / Cash Distributions for Tax Purposes

Tax documentation questions are often the most common ones we get (besides returns) during the lifespan of a deal.

If you pay attention to these notes in the agreement, you’ll have a lot less surprises down the road.

Here you’ll find how profits and losses will be allocated from operations as well as capital transactions.

You will also see how your interests are treated for IRS purposes.

Finally, a “tax representative” will be designated from the GPs.

* * *

This brings us to the end of our PPM discussion.

Yes, there is a lot of (dry) reading to be done when you participate in a multifamily deal. But at least you can use this article series to identify the most important topics, and to act as a guide for the labyrinthine and often confusing document that is the Private Placement Memorandum.

You are now armed with the basic financial and legal acumen to invest in a syndication!

Best of luck to you and happy investing.

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