What is a private placement memorandum for real estate?
A private placement memorandum also called an offering memorandum or a PPM, is a legal document issued to potential investors in a private deal by a private company. But what important information can be found in this document?
A company’s offering memorandum consists of a set of documents that can include:
- Executive summary
- Property location and other considerations
- The investment summary
- Risk factors
- Photos of the property
What is it used for?
A PPM is used when a company sells securities for all types of private real estate offerings. Examples of different types of offerings are crowdfunding, a private real estate investment trust, syndication, and a real estate investment fund.
Why is it important?
It is important to have a PPM to provide for investors. A well-written PPM will have many disclosures about the various risks that a particular investment poses. The contents of a good PPM should scare you. Some of the disclosures may be:
- Investing in real estate is risky
- You may lose all your money
- The issuer doesn’t have much experience
- The investment is unsceured
In reality, text like this will be familiar to sophisticated investors. A PPM that has many of the possible scenarios of how things can go wrong, can be in an indirect way, a sign that the PPM’s issuer knows exactly what they are doing.
A PPM is a document meant to protect the issuer. It is not a document that is used to sell the opportunity.
What is included in a PPM?
- Intro – Short overview of the investment and the company. Gives potential investors an idea of what the investment is.
- Executive summary – Includes the deal you are offering, description of the executives’ industry experience, and deal financing requirements.
- Investment summary – Has the properties purchase price, preferred return, projected return, total capitalization, sponsor company, asset manager, proposed structure, distributions, acquisition fee, management authority, and proposed use of the proceeds.
- Location – An aerial view of the site, the properties location on a map, and a secondary map of nearby important places such as public transportation methods and grocery stores.
- Photos of the property – Interior and exterior images of the property. Also include images of nearby parks, stores, and even schools if there are any.
- Sources and uses – Provides the amount of debt and equity to be raised. Also included should be the uses of funds. Some examples would be closing costs, purchase price, working capital and acquisition fee.
- Competitors – Shows the competitors in your market, how you rank against them, and the competing property’s financial information.
- Offering terms – Shows the expected rate of return, the minimum investment, and expected length of the investment term. In addition, this describes how equity for the property will be split between the investors and the issuer.
- Loan terms – The loan terms describes, the loan amount, the borrower, interest rate, term, amortization, and what collateral does the lender have on the deal.
- Market overview – Information detailing the real estate market where your property is located. Also covers information about the city such as its financial status, population, and supply and demand of properties in the city.
- Type of investor – Should explain what types of investors you are looking for.
- Risk factors – Must include all risks connected to the tax, business, accounting, and legality of the property. Each of the risks should have individual descriptions further explaining them.
Additional documents that should be provided with a PPM
A PPM should be given to investors with other documents that are connected to the deal.
An operating agreement must be accompanied by the PPM if the investors are buying shares as either a limited partner in a limited partnership or a membership interest in an LLC. Basically, this document explains how decisions are made, how the company is organized, and who has voting rights.
Another document that should be provided with a PPM is a subscription agreement. In this document, you need to include a section where the investors can acknowledge that they have read the PPM. This is also where the terms of the deal will be spelled out.
Additional documents that may also be included with a PPM:
- Appraisals
- Purchase agreement for the property
- Contracts for renovations
- The company’s financial statements
- Escrow agent agreements
Investments in general are risky, and investing in a private company can be even riskier. Make sure to always only invest money that you can afford to lose.