A limited partnership (LP) investment in real estate is, from a legal perspective, buying a security. This is because an LP investment in real estate involves the purchase of an ownership interest in a real estate venture, which is considered a security under the federal securities laws.

The federal securities laws define a security as any investment of money in a common enterprise with the expectation of profits solely from the efforts of others. This definition includes stocks, bonds, and other investment instruments, as well as investment contracts and other types of ownership interests in a business enterprise.

In the case of an LP investment in real estate, the investor is purchasing an ownership interest in a real estate venture, which is a common enterprise. The investor expects to earn profits from the venture, and these profits are expected to come solely from the efforts of the general partner, who is responsible for managing the real estate venture.

The general partner or GP is typically a professional real estate developer or investment firm, and the limited partners are individual investors who contribute capital to the venture in exchange for an ownership interest. The limited partners do not have any direct control over the real estate venture and do not actively manage the property. Instead, they rely on the expertise and efforts of the general partner to generate profits from the venture.

The limited partners in an entity that owns real estate typically receive a share of the profits generated by the venture, as well as a share of any appreciation in the value of the property. They may also receive tax benefits, such as deductions for mortgage interest and property taxes.

From a legal perspective, an LP investment in an entity that owns real estate is considered a security because it meets the definition of an investment contract under the federal securities laws. An investment contract is an agreement in which a person invests money in a common enterprise and is led to expect profits solely from the efforts of others. In the case of an LP investment in real estate, the limited partners invest money in the venture and expect profits solely from the efforts of the general partner.

It is important to note that not all real estate investments are considered securities. For example, the purchase of a rental property for the purpose of generating rental income is not considered a security. However, an LP investment in real estate, in which the investor expects to earn profits solely from the efforts of the general partner, is considered a security.

In summary, an LP investment in real estate is a security because it involves the purchase of an ownership interest in a common enterprise with the expectation of profits solely from the efforts of others. The limited partners of an LP investment in real estate do not have any direct control over the venture and do not actively manage the property, but rather rely on the expertise and efforts of the general partner to generate profits from the venture. As such, an LP investment in real estate is subject to the federal securities laws and must be registered with the Securities and Exchange Commission (SEC) or qualify for an exemption from registration.

Disclaimer: Invown is not a law firm or an attorney and is not qualified to provide legal advice. Any information provided by Invown should be taken as informational and educational in nature and should not be considered as legal advice. Invown is happy to consult with sponsors and offer advice on how to potentially structure a real estate deal, but ultimately it is the responsibility of the sponsor to seek proper legal counsel before entering into any agreements.