GP-LP Alignment Explained: Fees, Co-Invest, Waterfalls

January 2026

In real estate syndications, investors are not only evaluating a property – they are evaluating a partnership structure. How general partners (GPs) are compensated, how much capital they invest alongside LPs, how returns are distributed, and how information flows over time all shape incentives and behavior. Together, these elements determine whether interests are aligned – or whether outcomes can diverge.

This article explains the core components of GP–LP alignment, focusing on fees, co-investment, waterfalls, and transparency, and how LPs should interpret them in practice.

What “Alignment” Actually Means

Alignment does not mean that GPs and LPs have identical economics.

It means:

• GPs are rewarded for long-term performance, not just transaction volume

• LP capital is prioritized before GP upside meaningfully accrues

• Downside risk is shared rather than disproportionately shifted

Alignment shows up in structure and behavior, not promises.

Understanding Syndication Fees (Context Matters)

Fees are a normal part of syndications. They compensate GPs for sourcing, structuring, and operating investments.

Common fee categories include:

• Acquisition or closing fees (often ~1-3% of purchase price)

• Asset management fees (commonly ~1-3% of invested equity annually)

• Property management fees (typically paid to third parties)

• Disposition fees (often ~1% at sale)

These ranges are illustrative, not rules.

What matters is context:

• Are fees reasonable relative to deal complexity?

• Are they front-loaded, or earned over time?

• Do they incentivize execution, or simply activity?

High fees do not automatically imply misalignment – but fees that dominate outcomes regardless of performance deserve closer examination.

Why Co-Investment Matters

Co-investment refers to how much capital the GP invests alongside LPs.

Meaningful co-investment:

• Signals conviction in the deal

• Aligns downside risk

• Encourages disciplined, long-term decisions

Indicative practices vary, but in many syndications LPs look for GP capital representing roughly 5-10% of total equity, depending on deal size, GP net worth, and the overall structure of the transaction.

What matters most is not hitting a specific percentage, but whether:

• The capital is meaningful relative to the GP’s balance sheet

• It is invested on the same terms as LP equity

• The GP participates in losses as well as gains

A smaller percentage may still be meaningful in larger deals, while a higher percentage may be expected in smaller transactions. The key question is whether the GP’s capital is material enough to influence behavior.

How Waterfall Structures Work (At a High Level)

A waterfall defines how cash flow and profits are distributed between LPs and GPs over time.

While structures vary, many follow a general progression:

1. Return of capital to LPs

2. Preferred return to LPs (often in the ~6-8% range, depending on deal type)

3. Split of remaining profits between LPs and GPs (for example, 70/30 or 80/20)

These numbers are indicative, not standards.

The purpose of a waterfall is to:

• Protect LP capital

• Establish performance hurdles

• Incentivize GPs to outperform baseline expectations

Waterfalls translate performance into economics.

Preferred Returns – What They Are and Aren’t

A preferred return (or “pref”) establishes a threshold that must be met before GPs participate meaningfully in profits.

Important clarifications:

• A pref is not guaranteed

• It does not replace underwriting discipline

• It does not eliminate risk

A pref primarily affects priority and timing, not certainty.

Deals with attractive prefs but weak fundamentals should still be viewed cautiously.

Transparency and Communication as Alignment Signals

Alignment is not only financial.

How sponsors communicate over the life of a deal is often one of the clearest indicators of alignment.

Positive signals include:

• Clear discussion of assumptions and risks upfront

• Regular, consistent performance updates

• Willingness to explain deviations from plan

• Transparent communication during challenging periods

A lack of transparency often becomes most visible when outcomes fall short of expectations.

Communication practices do not change deal economics, but they strongly influence how aligned a partnership feels over time.

Alignment Is About the Whole Structure

No single feature determines alignment.

Strong alignment typically reflects a combination of:

• Reasonable fee structures

• Meaningful GP co-investment

• Performance-based waterfalls

• Transparent communication

Weak alignment often shows up when:

• Fees dominate outcomes regardless of performance

• Upside skews heavily to GPs before LP hurdles are met

• GPs face limited downside exposure

Alignment should be evaluated holistically, not by checking a single box.

How Alignment Fits Into Deal Evaluation

GP-LP alignment should be considered alongside:

• Market and asset selection

• Underwriting assumptions

• Financing structure

• Sponsor experience

Alignment does not compensate for weak fundamentals, but misalignment can undermine strong ones.

(For sponsor context, see Evaluating Sponsors & Track Records.)

A Practical Way to Think About Alignment

Rather than asking “Are the fees low?”, a more useful question is:

“Does this structure reward long-term performance and penalize poor outcomes?”

That framing keeps alignment in its proper role.

Final Perspective

Alignment is not about minimizing GP compensation.

It is about ensuring incentives encourage thoughtful execution, prudent risk management, and long-term value creation. For LPs, understanding fees, co-investment, waterfalls, and communication practices turns complex deal terms into meaningful signals about how a partnership is likely to function over time.

Note: This material is for educational purposes only and is not intended as tax, legal, or investment advice. Investors should consult appropriate professionals regarding their specific circumstances.

Continue Learning

This article is part of a broader learning series on passive real estate investing.

→ Start from the beginning here: Passive Real Estate Investing Learning Guide

→ Next recommended read: How to Compare Multiple Deals Side by Side (Coming Soon)