The Power of Co-Investing in Commercial Real Estate: Opportunities and Roles

Co-investing lets investors put capital into specific commercial real estate deals alongside a sponsor, either passively as a limited partner (LP) or actively as a co-general partner (co-GP). This guide explains the two roles, their rights and obligations, and what to review before committing. It is part of our investment grade real estate research; for tenant credit, see the investment grade guide.

What Is Co-Investing?

Co-investing means investing in a specific property or portfolio with a lead sponsor, rather than in a blind-pool fund. Typical features:

• Deal selection: you choose which deals to join and can review each one, though as an LP you do not control decisions after investing.
• Fees: co-investment fees and profit shares are set deal by deal and can differ from those of a fund; compare them on the same basis.
• Diversification: spreading capital across several deals, sponsors and markets reduces dependence on any one of them, but each deal is concentrated in its own property.

Smaller investors can now access co-investments through online platforms and sponsor offerings, though many are limited to accredited investors.

Co-Investing as a Limited Partner

An LP provides capital and does not take part in day-to-day management. LP returns come from distributions and profit shares set by the operating or partnership agreement, often with a preferred return before the sponsor shares in profits.

Limited liability, and its limits

An LP’s liability is generally limited to its investment. But the governing documents can require more: unfunded capital commitments or capital calls, clawbacks of distributions, indemnities, and any obligations an investor agrees to separately, such as a guarantee. Some agreements penalize investors who do not fund a capital call by diluting their interest. Review these provisions with counsel before investing.

Advantages

• Access to larger properties and professional management.
• Diversification across deals and sponsors.
• No operating responsibilities.

Risks

• Illiquidity: capital is usually committed until the property is sold, and transfers often need sponsor approval.
• Sponsor dependence: results depend on the sponsor’s execution and judgment.
• Market risk: rates, rents and values can move against the business plan.

The Co-GP Role

A co-GP works with the lead sponsor and shares in managing the deal, which can include sourcing, raising equity, overseeing operations and investor reporting. In return, co-GPs usually share in sponsor fees and the sponsor’s profit share.

• More influence and potential return, along with more work and risk.
• Guarantees: co-GPs may be asked to sign loan guarantees, including nonrecourse carve-out guarantees, which create personal liability.
• Securities rules: a co-GP whose main role is raising capital in exchange for compensation can raise securities law issues; take legal advice on how the role is structured.

Review Checklist Before You Invest

• Fees and profit split: acquisition, asset management and disposition fees; preferred return; and the sponsor’s share of profits.
• Decision rights: what investors can vote on, and whether they can remove the sponsor.
• Unfunded commitments and capital calls: how much more you could be asked to contribute, and the penalty for not funding.
• Transfer restrictions: whether and how you can sell your interest.
• Conflicts of interest: affiliated property managers, lenders or other deals that compete for the sponsor’s attention.
• Downside scenarios: the projected results if rents fall, costs rise or the exit cap rate is higher than planned.
• Track record: projected versus actual results on the sponsor’s fully exited deals.

If you prefer to own property directly instead, compare the options in owning real estate vs. investing in syndications.

Frequently Asked Questions