Limited Partnerships for Property Development
It has become increasingly common for Limited Partnerships to be used as a vehicle for property developments. In this article we discuss the main features and advantages of a Limited partnership.
What is a Limited Partnership?
A Limited Partnership is a separate legal entity. It has a separate legal status from its limited partners. In this way it is similar to a company (where shareholders have a separate legal status to the company).
It consists of:
- A General Partner who can be an individual or a company. The General Partner’s role is to manage the Limited Partnership and is jointly and severally liable for its debts. It is also ultimately liable for any debts or liabilities of the Limited Partnership if the Limited Partnership is unable to satisfy them. It is possible for a Limited Partnership to have more than one General Partner. There is no requirement for a General Partner to make a contribution to a Limited Partnership.
- Limited Partners – these are the investors into the Limited Partnership. They usually make some form of contribution (cash or other assets) to the Limited Partnership and take no role in its management. Each Limited Partnership must have at least one Partner.
- A Limited Partnership must have a Limited Partnership Agreement which sets out the how the Limited Partnership will be managed and governed. The Agreement must contain the following information, as a minimum:
- Details of any restrictions on a limited partner’s right to assign or dispose of their partnership interest
- Any restriction on the business or other activities which the Limited Partnership can undertake
- Whether the General Partner can compete with the Limited Partnership
- Each limited partner’s entitlement to distributions
- How a limited partner can leave the Limited Partnership
- When and how the Limited Partnership will terminate
- Whether or not the Limited Partnership has a conflict of interest policy.
What are the advantages of a Limited Partnership?
- The identity of each limited partner is confidential – there is no requirement to disclose the names of each limited partner on the Register of Limited Partnerships. The only information which is available on the Register of Limited Partnerships is the name of the Limited Partnership, its date of registration, address of its registered office, its address for service and the name and address of its General Partner(s).
- The fact that a limited partner has no role in the management of the Limited Partnership could make it attractive to an investor who wants to contribute capital but does not want to have any involvement in the management of the limited Partnership.
- A Limited Partnership is a flow through entity meaning that profits and losses flow through to the limited partners. There are other tax advantages which can apply and tax advice should be sought by anyone looking to become a Limited partner.
- Limited Partnerships have more flexibility in general and can be structured in different ways to suit a particular business (or development).
- There is no requirement for the financial statements of a Limited Partnership to be audited unless is it a public issuer or a large limited partnership under section 45 of the Financial Reporting Act 2013 or it has opted into this requirement. However, under section 75F of the Limited Partnerships Act 2008 it is possible for limited partners who have contributed at least 5% of the total capital contributions of all the limited partners, to give written notice (given within 6 months after the start of the accounting period) requiring the Limited Partnership to prepare financial statements and / or have financial statements audited and or distribute the financial statements to the limited partners.
Tips for using a Limited Partnership for Property Development
- Get expert accounting, tax, and legal advice. It is vital that the Limited Partnership Agreement contains the provisions required under the Limited Partnerships Act 2008 and the other provisions needed for the property development it is undertaking.
- Consider carefully how the General Partner is to be managed – if the General Partner is a company and there are a number of shareholders a shareholders agreement should be seriously considered.
- Take advantage of the ability under the Limited Partnership Act to exclude fiduciary duties owed by the General Partner to the Limited Partnership.
- An interest in a Limited Partnership is deemed to be a financial product under the Financial Markets Conduct Act 2013 (“FMCA”) so the disclosure provisions under that Act apply. These include the requirement to provide potential investors with a Product Disclosure Statement. It is common for investments in Limited Partnerships to be restricted to investors who fall within one of the exemptions under the FMCA – for instance, the Wholesale Investor and/or Eligible Investor exemptions which means that a Product Disclosure Statement is not required provided certain requirements are met. Legal advice is vital to ensure that the requirements of the FMCA are complied with.
- Take particular care in the promotion of the Limited Partnership. Even if investment in the Limited Partnership is restricted to investors who fall within one of the FMCA exemptions, the Fair Dealing provisions in the FMCA apply. These provisions prohibit misleading and deceptive conduct, false or misleading misrepresentations or unsubstantiated misrepresentations. There are serious civil and criminal penalties which can apply for breaches of the FMCA.
Tips for investing in a Limited Partnership for Property Development
- Do your due diligence – take your time to find out all you can about the Limited Partnership. What business will it be undertaking? How risky is it?
- Who is involved in the Limited Partnership and in particular who are General Partners or if the General Partner is a company who are its directors? What relevant experience do they have?
- Get independent advice – from an accountant and a lawyer who is familiar with Limited Partnerships.
- Review the promotional material and Limited Partnership Agreement carefully – understand how much you are expected to contribute and could you be asked to contribute more in the future? What fees is the General Partner receiving? When are you like to receive distributions? Are you able to withdraw from the Limited Partnership and get your investment back? What information are you entitled to – will you receive regular financial statements or information about the business of the Limited Partnership? Does the Limited Partnership get its accounts audited?
Whether you are looking at forming a Limited Partnership or investing in one – expert advice from an experienced lawyer and accountant is crucial.
For assistance please contact Lizandra Bailey, Partner, DDI 09 487 0018 [email protected]
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