REITs & RELPs
Single vs. Pooled Properties
The limited partnerships administered by LEAGUE, unlike the IGW REIT, typically own and offer investment in a single property.
Real Estate Limited Partnerships-or RELPs-are a form of syndication that shares many of a REIT's desirable features-including potential financial rewards, investment security, and tax benefits. As with the REIT, the RELP investor is spared management responsibilities, relieved of liability for principal debt, and in many cases can make a cash investment of any size.
The party responsible for the conduct of the RELP is called the General Partner, whose responsibilities are comparable to those of a trustee of a REIT. The General Partner is granted all decision-making responsibilities for the investment, and also assumes liability for it. The other partners in the group are Limited Partners-which means their financial obligation is limited to their initial investment.
Unlike REITs, however, which offer long-term investment in a diverse portfolio of properties and provide liquidity, RELPs are often used for shorter-term projects, and often do not offer interim cash distributions.
Two Types of Opportunities
RELPs are commonly formed to take advantage of two types of shorter-term investment opportunities: built-from-scratch developments, or the renovate-and-sell variety. In either case, the properties usually do not immediately produce cash flows-and if they did, the cash would probably be put to best use funding the projects' construction or redevelopment.
Once the development or renovation is complete, however, the value of the property will often be significantly higher than that of the initial investment. Unless further work is planned, the General Partner at this stage may consider triggering a "liquidity event", such as refinancing or selling the property. In most cases any profit would be disbursed to the Limited Partners.
All About Liquidity
Unlike REITs, RELP investments are generally not redeemable before a predetermined "liquidity event". All the capital raised from investors and mortgage lenders is earmarked for the purchase of the property and its development. Therefore, unless the RELP unit-holder or the partnership manager can find a purchaser for the units between liquidity events, and unless a sale of such units is permitted under applicable securities laws, the investor is usually in it for the duration.
However, there is another strategy for early redemption that may apply. In some cases, a larger RELP-which itself may be controlled by a REIT-might be an interested buyer, in which case a tax-deferred roll-over transaction could take place. In such a roll-over, the RELP investor's units would be "absorbed" into the REIT pool-the RELP units exchanged for the equivalent in REIT units. In so doing, the former RELP investor would acquire greater portfolio diversity, and a capital gain on which the tax could be deferred until the REIT units were sold.
