LP vs GP - the two sides of every deal

LP and GP are job descriptions wearing initials so everyone at the table can pretend the control question has already been answered.

It has not.

The GP, sponsor, or manager generally runs the investment within the governing documents. The LP or passive investor generally contributes capital and receives narrower rights. That split is the structure, not a judgment. It becomes dangerous when an investor hears “passive” and assumes someone also removed the risk.

Your economic exposure can consume your entire investment while your authority fits inside a few clauses.

Who gets the steering wheel

The GP typically sources the property, arranges financing, closes, hires and oversees property management, approves budgets, communicates with the lender, reports to investors, and makes major decisions allowed by the governing documents.

The LP does not usually approve individual leases, invoices, roof bids, or routine operating decisions. LPs may vote on certain major matters. The exact rights depend on the deal documents, which is why the alphabet is the least important part of this lesson.

Write the division down:

• Who can sell or refinance the property?
• Who can replace the property manager?
• Who can approve affiliate transactions?
• Who can request additional capital?
• Which actions require member approval, and by what threshold?
• What information and reports must investors receive?

If the sponsor answers every question with “we,” ask which we. The word has been hiding authority since the first committee meeting.

Let the documents assign the roles

The operating agreement should identify the manager, voting thresholds, capital-call rules, transfer restrictions, distribution mechanics, removal rights, and authority to sell or refinance.

The PPM should disclose risks and conflicts. The subscription agreement records what the investor is agreeing and representing. The deck can summarize the structure, but it does not outrank those documents.

If the deck promises “investor-friendly control” while the operating agreement gives the manager broad discretion, believe the clause that survives a dispute.

You were going to skim every sentence beginning with “Manager may.” Do not. Those two words are the sponsor answering your control interview in writing.

Put $400,000 into the blank

Suppose renovations fall behind and the property needs another $400,000 to continue the plan. Who decides whether to slow construction, use reserves, change property managers, seek a capital call, refinance, or sell?

Then ask what happens if you do not contribute. Can your interest be diluted? Can another member fund the shortfall? Is the contribution optional or required? Which decision requires an investor vote?

This is the difference between receiving information and holding authority. A communicative sponsor may keep LPs informed throughout the problem. That does not make the LP the decision-maker.

Interview the GP about an ugly choice

Ask for one deal that left the original plan. Have the sponsor describe the decision they personally made as GP, the authority they relied on, the alternatives rejected, and what investors learned at the time.

Listen for lender conversations, reserve use, budget reductions, insurance issues, leasing changes, capital needs, or a difficult sale. A useful answer names the choice. A polished answer keeps promoting the team until the question expires.

Fill in the authority matrix

Circle every use of “Manager may,” “Manager shall,” “Member approval,” and “Major Decision” in the operating agreement. Then complete two sentences: “In this deal, I control ___.” “The sponsor controls ___.”

Large blanks are not embarrassing. Discovering them after the wire is.

Take that authority matrix to your attorney and have the actual language checked. Passive ownership can be entirely rational. Just do not rent the passenger seat and tell yourself you have a steering wheel.