Picking the right partner is key

In many respects, a real estate partnership is like a marriage. It’s easy to fall in love at first sight; it’s only when you are still going strong years later that it becomes a success. The secret to longevity in both types of relationships is choosing the right partner from the start.

In most partnerships there is an operating or general partner and there is a capital or limited partner. Typically, the general partner is responsible for the day-to-day management of the asset and the limited partner is responsible for contributing the majority of the capital and overseeing the collective investment. Over the life of any partnership, there are changes and stresses that occur, and preparing appropriately and performing up-front due diligence on your partner is critical to success.

Just as you would research the investment or asset itself, investing time in due diligence on your partner before doing a deal can determine ultimate success or failure. Having lived through many successful partnerships and some failed ones, I can share with you some areas of consideration that partners needs to understand before joining as one.

Most important, both partners need to have experience with the target investment and share a similar view of the factors that lead to success. First, we will discuss due diligence from the limited partner perspective. Any “great acquisition” can unravel through a general partner’s poor execution of the business plan; therefore the first consideration should be on the prospective general partner’s applicable experience and capabilities with the target asset or investment. It is critical for the limited partner to understand the nuances of the general partner’s prior experience. For example, prior experience as a successful homebuilder does not necessarily constitute residential land development experience. Similarly, successful apartment development experience may not translate to the success of an apartment deal that is driven by tax credits.

A general partner also should understand a limited partner’s prior experience with the target asset class. While some may view a limited partn