RELPs

There are two specific types of limited partnership programs that you’ll need to be aware of: real estate limited partnerships (RELPs) and oil and gas programs. RELPs are similar to REITs, but with a different business structure. Oil and gas programs are business ventures that focus on drilling for natural resources.

RELPs are limited partnership investments that aim to make market returns based on their real estate holdings. There are many ways RELPs accomplish this task. Some RELPs invest in real estate for capital appreciation, which occurs when property values rise. Others collect income from mortgages or tenants paying rent.

RELPs also pursue unique tax credits and deductions. Tax credits can be achieved when supporting government-subsidized projects like low-income housing or rehabilitation of historic properties. Tax deductions are achieved through mortgage interest payments and the depreciation of properties.

In general, there are five specific RELP types to be aware of:

Undeveloped (raw) land RELP

• Acquires undeveloped land
• Seeks capital appreciation (buy land low, sell land high)
• No income potential
• Generally no tax benefits
• High risk and return potential
• Example: A LP buys land outside of the city and sells properties to developers as the city expands

New construction RELP

• Constructs new buildings
• Primarily seeks capital appreciation
• Potential income from leases
• Tax deductions from expenses and depreciation
• Moderate to high risk and return potential
• Example: LP builds a new apartment complex and sells property or leases to tenants

Existing structure RELP

• Acquires existing properties
• Primarily seeks income from leases
• Capital appreciation potential if property is sold
• Tax deductions from depreciation, mortgage interest, and maintenance expenses
• Moderate to low risk and return potential
• Example: LP buys an existing commercial office building with many current tenants

Government-assisted housing RELP

• Acquires or builds government subsidized buildings
• Seeks income from leases
• Little to no capital appreciation potential
• Tax credits provided for low-income tenants
• Tax deductions for depreciation and maintenance expenses
• Low risk and return potential
• Example: LP obtains apartment complex and rents to government-subsidized tenants

Historic rehabilitation RELP

• Acquires and improves historic properties
• Capital appreciation potential
• Tax credits are provided for preserving historic properties
• Tax deductions for depreciation and maintenance expenses
• Moderate risk and return potential
• Example: A LP obtains a historic building, updates and improves it, then sells the property that will become a museum

Investors often weigh the pros and cons of RELPs vs. REITs. Both invest in real estate projects but are structured differently. RELPs are limited partnerships that come with liquidity concerns and the added benefit of passing through losses. REITs are trust units that generally avoid liquidity risk (except for non-listed and private REITs), but do not allow losses to be passed through (only income and gains).