Navigating GPLP Structures in Real Estate: Protection & Financing Tips

Introduction

Welcome to the Wisdom Lifestyle Money Show. I'm your host, Scott Dillingham. The show is designed to help Canadians invest better in Canada and the United States. We are the North America-based mortgage financing lender and provide education to both countries.

Discover how you can become a better investor and access the financing you need. But we're gonna be talking about something quite exciting today that helps a lot of investors. And, you know, depending on your lender, certain structures can be a challenge. And obviously, if you're working with the wrong legal representation, right, you're not gonna set yourself up for success.

So... Same with brokers.

Exactly. So this is why I think this is so important that we discuss this and, you know, show everybody like what the options are. So we're talking about navigating GPLP structures in real estate. So now, before we get started, I want you guys to know that there are so many lenders out there that do not support certain entities.

The Core Idea

So what we've done in the past is we'll suggest the client, and you know what, I'll mention what it is and then I'll have you explain it, Milena. But what we'll do is we'll have the client set up sort of a fair trust agreement. So then from the lender standpoint, they're able to close on the personal name, but it does get pushed. And I'll let you explain that, but it allows the clients to have multiple lenders that they can tap into to access the best pricing.

So what are you... What are you losing?

Yeah. Why don't you explain what the bear trust is? And then we can talk about protecting the investor and just a different thing.

So yeah, let's start there. So what's in bear trust?

Deep Dive

So really interesting question. So there are trust relationships in all kinds of structures that are used by real estate investors. So for example, in a joint venture agreement, if only one person is on title to a property, the joint venture agreement will set out the trust relationship to say, this person is on title holding the property in trust for the joint venture. So sometimes even it's not even one of the joint venture partner.

For example, I have deals where even we've entered into a joint venture agreement between our corporation and a partner's corporation. And then one of us will hold the property in our personal name in trust for the joint venture. So we use these trust relationships all the time. In fact, in GPLPs, which is sort of like what we're going to talk about a little bit like right after this, is oftentimes we'll talk about a nominee corporation to hold the asset.

That's when the asset or the property is not held in the name of the GP. And it's held in the name of a trust corporation in trust for the GPLP, for the limited partnership. And so what a bear trust is, is a contract in which there's nothing else to the contract except for the trust relationship. Most of the time we'll use a bear trust, meaning this poor trust agreement, it's very short document, in the case of someone holding a property in trust for their corporation or for another person.

So usually a family member. So we'll use a bear trust agreement, for example, in the case of, you know, common law partnership or brother and sister who are in it together and they decide they don't need their relationship documented, although I don't recommend that. But most of the time a bear trust will be used for the purpose of severing the registered ownership and the beneficial ownership such that the person that holds the property on title is not the owner in the back.

Practical Steps

Yeah. Yeah.

No, and that makes sense. And I think like some people, you know, hearing and tuning in, they might say, what the heck is GP and LP? So why don't we also start there and explain that? And then we can dive into really how this can help the investor out.

So what is GP and LP? I've done presentations on bear trust and GPLPs and Lensity. So if anybody wants to go a little bit deeper into the basics of how these things, what, you know, what the words mean and how these things are set up and what it actually represents in the day-to-day of how that's set up together with sort of like, I had like a slideshow presentation for these things. So please go and view these videos and come back to this one.

But yes, the gist of it is, at the core of it, is that there is, and when we talk about a GPLP, we're talking about a limited partnership. So why is the word limited? Because at its core, it's a partnership. It's people coming together to do a thing, right?

Key Takeaways

So, and it is a form recognized by law as having certain criteria and certain benefits and responsibilities. So a limited partnership, the word limited refers to the level of liability of the partners. So a limited partnership limits the liability of the partners except for the general partner. And if we enter into, say, Scott, you and I enter into a partnership, we're saying the two of us are going to, you know, we're going to start a business together and we're going to do it through a partnership.

We're going to be both just as equally liable for the business, right? In a limited partnership, the partners don't have liability except for the general partner. So if you and I enter into a limited partnership and you bring cash and I do the work, I'm going to be the general partner. I'm going to shoulder all of the liability for the project.

And you're just going to bring the money, get some benefits from that money, have nothing to do with the management and reap the rewards without any of the liability on your shoulders. But the flip side is you don't have much of a say. That's really the gist of a GPLP. The main benefit, and we talk often about a GPLP colloquially, but really at its core, it's a limited partnership.

That's the important piece. Yeah. So if I'm hearing you right, the GPLP is absolutely designed to protect the investors in certain cases.

Resources

Is that right? Absolutely. It's basically saying, if you investor don't have much to say in the day-to-day of the project, we're going to strip all the liability off of you, completely shield you from the liability, and put it all onto the managing partner, the general partner.

Okay. Okay.

So that's great. So I'm going to ask you the question, but from the opposite end. So then, what do you see as the biggest risks for investors that are wanting to partner together, right? So then we can visualize and we'll be able to see how these types of structures will help.

Absolutely. The biggest risk, well, is to not have the documents drafted properly. For example, there are situations where the general partner also owns units as an LP. Well, those units are therefore not protected.

Introduction

The general partner, because it is the general partner and has a managerial role, will not be protected from liability. liability. Also, there are certain aspects of risk for the limited partner because the limited partner doesn't get much of a say, which at its core is typically a good thing because then the limited partner is protected from liability and also doesn't have to do the work. On the flip side, the limited partner therefore has a limited involvement in the decision-making and so it's putting a lot of power on the general partner.

So, I would say one of the risks is not vetting the general partner properly and not, you know, a joint or a GPLP set up with a general partner that is not knowledgeable enough and not able to take the project to its conclusion is risky. I oftentimes when I have clients who want to buy units in GPLPs or in NLP, I recommend vet the people behind the project and yeah, those are some of, a few of the items that I can think of offhand and then there are also like the mortgage implications which we'll talk more about.

Yeah, no, absolutely and then so just to like really showcase your value really, I mean, what are some additional risks if say somebody doesn't go to somebody like you that has experience in this they're like, oh, we just want to join venture like what have you seen or what are some horror stories that maybe you could share right to really outline why somebody who's listening who wants to protect themselves and partner in real estate why like your services would be so valuable? Well, thank you for asking me that.

I'd say there, I say if a lawyer takes on the responsibility of creating a GPLP for a client typically they have the know-how to create the GPLP but not all of them are going to be real estate investor focused. One of the things that I've seen is having an overly complicated LP agreement which an LP agreement it's kind of like a will you know it's one of those documents that will be heavily legally easy really hard to get around that. 5% down because that's when this property covers itself you know what I mean!

The Core Idea

So that's the only thing makes sense so when we use GPLPs typically what I've seen is GPLPs are used for development projects or large multi-family that's where I've used it the most or commercial settings like hotels or that sort of setup and so what are your thoughts on when it makes sense sort of like as a threshold to use a GPLP yeah so I mean I think you nailed it kind of already when you said it does depend on the project because like we'll go back to the single family house why would you set up that type of process and that thorough of an investment vehicle on a single family house I don't know if that makes sense there but I do agree on the larger projects absolutely you want to protect yourself and limit your liability and it's especially true because look at a development property right you're giving the money to the developer in hopes that they can complete the project but what if it stalls what if the cost overruns they didn't analyze properly and they have all these expenses and they run out of money and they can't complete it the lender comes after them right so you want to separate from that especially if somebody needs to be in my opinion heavily heavily involved because the success of the project depends on that GP and you've already stated that people should investigate who their general partner is and the strength in them right just to make sure the project can come to completion so in those cases absolutely I like the structure but if it's a smaller house like you see people now that they can't afford a house it's so much money so you're seeing people there's even local mortgage companies to us that are like setting up kind of like these virtual not virtual but like date nights where buyers just come in and they meet each other and they don't even different but you wouldn't set up a GPLP in this case you know what I mean so I do think I'm for sure I'm a project and most of the time the question I get from clients is hey I'm buying this project I found this great deal should I set it up as a GP as as an LP GPLP structure as a joint venture or as a corporation with the investors being shareholders right that's the question I get most of the time and by the way this really typically only comes into play when people are raising equity because if they're buying the project themselves they don't need LPs they don't need you know passive shareholders and they don't need a joint venture investors too for the passive investors they get a better deal they get a bigger bang for their buck in the long run but oftentimes they don't get the same level of cash flow so it's kind of a cross up and it really depends on each individual investor's comfort level with different structures but yeah so the question that I get most often is how do I structure this deal do I majority of the time the deciding factor is their ability to finance the project and if the project is of a certain size that we might recommend a GPLP usually it's because of the recognition by the by lenders especially CMHC lenders of GPLPs without having to have the individual LPs qualify the LP itself qualifies like the partnership itself will guarantee the mortgage but not the individual investors in the background that's my understanding anyway yeah no I agree fully it's it's just yeah it's a really interesting topic because every structure is different now would you advise for those you know listening say say I invest in project a and it's going well and then the same GP has project B and I want to invest in that would we alter the original GP LP to include that like a blanket one or would you recommend setting up another entity for a second project interesting I think it would be a case by case basis usually the LP agreement at least the way that I draft them have flexibility in them and might say the purpose of this project is to do XYZ with this property but usually there's any other you know we add something like any other project that the GP deems fit can be in this LP so in a scenario I'm trying to think of a scenario in which you know a GP LP gets set up for project A comes to completion or is sort of like midway and now the question becomes you know we have project B do we create a whole new structure or do we repurpose structure that we use for project A every single LP you know and I'm not necessarily talking about from a legal standpoint from a non-legal standpoint yes the GP could make the choice based on what's in the contract but typically the GP would have the authority to do that the risk is frustration by the investors right you don't want to have a wave of investors getting frustrated and pulling their money but the other thing is you're basically gifting a piece of the pie to the existing investors but it doesn't mean how I would probably approach it if there was an option to do that especially if it was a very similar project would be to have a meeting with my investors and say hey we have two options we found this gorgeous project we found this gorgeous project we can either create a whole different structure and raise capital in that structure or we can raise the capital inside the LP that we currently have bring in say another half a million dollars and then everybody all of the LPs or the whole LP owns both projects so you would get a piece of the pie in both so absolutely doable very rarely will I see that though especially since the lender in project A would probably have to approve of that and the lender in project B would then have to vet both project A and project B it's kind of like if you have multiple properties in a corporation and you want to refinance one of the properties the lender is going to want to know all the details for all your properties that's been my experience anyway so yeah so most time not advisable but certainly doable from time to time yeah okay yeah I'm just trying to come up with questions that I can think people having and one like I had an example of this so I have another question for you but like this past week alone we had a client that did a purchase but it's closing set up now they don't want the client to remove financing condition and then it doesn't get set up and it just screws things up so the lender is like we want this now so the client spoke to their lawyer and it was going to be a two week turnaround time to set this up so really yeah so then the client ended up saying that's way too long and they call so I don't know it depends on what that lawyer's bandwidth is at that particular time maybe they're working on an unusually complicated matter and just didn't have the bandwidth to do it I mean there's still work involved in doing that but typically we turn on corporations in a couple days so GPLP let's say you know we have a project we got to set this up how long!

would you! you think that would take on average we won't hold you but I steer to full disclosure I'm actually working on one right now that I was really hoping would get done in a week it probably will take two and a half when it's all said and done because there are quite a few moving pieces we have to draft the LP agreement which is 80% of the work but then we also there's all kinds of stuff that the individual investors have to sign and that have to be drafted for them also we have to actually create the GP corporation most of the time we start talking about is there going to be a nominee corporation or trust corporation for the purpose of holding the property and then we also have to discuss how the GP is held right so if you have two partners and a GP now we're talking a shareholder agreement to decide between those two business partners how that's going to look between them for the ownership of the GP players involved it's typically not like like oh we need a new corp are we even a JV a JV is pretty simple in comparison so even two and a half weeks I think will be a record for me but yeah it certainly takes a little bit longer the trick is to get the name of the LP because then the real estate closing document can be!