An agreement between a limited investment partner and a general partner may last a long time, even longer than some personal relationships. As such, investors will want to choose a general partner that is not only experienced and skillful but also accessible. Though experience and skill are paramount, limited partners also appreciate knowing their general partners personally, enough to even look forward to luncheons with them.
Experience
To serve investors General Partners must be equipped with experiences that prepare them for the unforeseen. Experience is a must, since a team with years of experience in commercial real estate management will have seen economic cycles, demographic transformation in cities, rare and costly repairs, challenges with tenants, hidden defects in real estate inspections, etc.
Experience can come in many ways as well: time, types of asset, extremity of business cycles, and others. A wise father once said, “You can have someone who’s worked for 20 years but only has one real year of experience. Unless you consistently revaluate your process and seek to be better, you fail to gain experience.” Investors should make sure they are partnering with a GP that has that kind of experience, the kind that comes from a relentless pursuit of improvement.
Skill
Along with experience, a general partner team needs skill and success markers. They must be proficient at sourcing and identifying profitable assets. The management and finance team must be highly skilled at valuation, thorough in underwriting, and assertive in negotiations. A good GP has working relationships with lenders in order to secure favorable and expeditious financing.
Their skill at property evaluation must extend beyond the properties boundaries. They should be aware of the net absorption in the surrounding rental market, employment trends, unemployment markers, new builds bringing in supply of rentable space, as well as many other market factors.
Their operations team must be very familiar with maintenance issues on a commercial scale, like scheduled fire panel maintenance or replacement, HVAC maintenance, etc. They will need to be cost-effective in janitorial administration, like evaluating daytime vs night-time headcount needs, investing in high efficiency janitorial equipment, like auto-scrubbers with built-in dust mops, self-propelled space vaccuums, and efficient exterior window washing methods. If they are managing a LEED-certified buildings, they should be familiar with green cleaning and sustainability. They must have experience with tenant requests and tenant billing, with the nuanced differences of rentable, billable, common, and total square feet, for example.
Their legal partners must have thorough knowledge of state laws, security laws and investor requirements, llc protections, tenant contracts, titling clearance, etc.
Accessibility
Limited and general partners are exactly that - partners, and as such they are both well served with open lines of communication. A limited partner should understand the decision making power of the GP, and the GP should understand the importance of continually bolstering relationships with each LP.
Of course the operating agreement should outline the legal responsibilities of each partner clearly. For example, it should delineate when and how special member meetings are called, how LP shares can be transferred with or without a right of first refusal clause, how to execute a substitution of a member of the managing LLC, etc.
Beyond the cerebral comprehensiveness of the operating agreement, however, both partner groups would further benefit by mutual approachableness in their operating relationship. For example, a GP should have an easily accessible investor portal through which an LP can review the history of cash distributions, expected cash flow, and current value of total assets. A GP can stand out from his competitors even further by not only being reasonably available by email or phone but also genuinely friendly and respectful.
More than one investor has stayed with their GP/Investment Advisor because of a quality interpersonal relationship, despite being constantly courted by other managers who advertised lower fees or higher projected returns. Ultimately, both partners will be more successful if the professional relationship between the two is positive and healthy.
The Takeaway
The partnerships between GPs and LPs can be highly lucrative for everyone involved. When experienced and skilled GPs connect with informed and motivated LPs, the resulting professional relationship can be exceptional, both in profitability and durability.
Potential investors in a GP/LP arrangement should look for a general partner that fits their investing profile and also has experience, skill, and accessibility.