When an individual commits capital to a private real estate investment, the transaction sponsor is required to provide them with a series of legal documents that outline the terms and conditions of the investment. One of those documents is known as a “Private Placement Memorandum” or PPM for short.
In this article, we will define what a PPM is, why it is important, and what information a PPM typically contains. By the end, readers should be able to use this knowledge to analyze the PPMs for their own real estate investment opportunities.
At First National Realty Partners, we create unique PPMs for all of our commercial real estate investment opportunities. To learn more about our current offerings, click here .
In a typical private equity commercial real estate investment transaction, a sponsor will find a property and place it under contract. To facilitate the transaction, a limited liability company (LLC) is formed and the property is purchased using it. To raise equity for the purchase, shares in the LLC are sold to investors.
With this structure in mind, a Private Placement Memorandum is a legal document provided to prospective investors who are interested in purchasing shares of the LLC.
NOTE: PPMs are not unique to CRE. As the name suggests, PPMs are used in “private” transactions where the securities being sold are not registered with state and/or federal investment regulatory authorities.
The purpose of the PPM in real estate is to describe the terms and conditions of the investment offering and is meant as a disclosure for investors so that they are aware of the specifics of the deal.
NOTE : Private investment offerings (as opposed to a public offering) are only available to accredited investors who meet certain income and/or net worth hurdles.
The specific contents of a real estate PPM vary depending on the deal and sponsor. However, they typically follow a similar outline that includes the following sections.
The introduction section of the PPM includes an overview of the deal, the basic terms, a brief statement about the company, the investment objectives, and all legends required by state and federal securities laws.
At its core, a PPM is a legal document. As such, it typically includes a series of disclaimers about the investment being offered. Often, the disclaimers can cover several pages, but typically contain the following key points:
The important point is that legal disclaimers are the fine print in the transaction and they should be read carefully. Although they can be lengthy and presented in legalese, legal disclaimers present a very clear disclosure to investors that the investment involves a high degree of risk and that they could lose some or all of their investment capital.
A private commercial real estate investment is inherently risky and the risk factor section in a PPM is dedicated to summarizing the risks in the investment. Typically, the risks include, but aren’t limited to:
The important point is that one of the major goals of the PPM is to provide potential real estate investors with awareness of the potential risks associated with the deal. They are outlined in this section.
In this section of the PPM, the transaction sponsor, the management team, their track record, and their management strategy is described. This is meant to provide investors with comfort that the real estate sponsor is capable of leading the transaction.
As described above, private securities are typically sold to raise the equity needed to close a commercial real estate deal. The use of proceeds section describes exactly how the funds will be used, including which portion goes directly towards purchasing the property versus how much goes to pay for fees and administrative overhead.
This section describes the specific terms of the investment offering. Typically, it includes the number of shares being offered, the price for each, and the required minimum investment. This section may also describe any lockup periods during which time the securities are illiquid and cannot be sold. In commercial real estate, lockup periods could stretch up to ten years.
Transaction sponsors do not work for free, and they often charge fees to support the administrative overhead involved with the effort required to find, underwrite, finance, and manage the real estate offering. Common fees include:
In short, real estate investors need to carefully review the investment’s fee structure as part of their due diligence process and compare it to other opportunities to see how it stacks up.
This section provides additional color on the rights, restrictions, and classes of securities being sold. It may also describe whether or not the issuer has the ability to change the capitalization of the company by doing things such as issuing more shares or issuing different classes of shares.
The procedures section is relatively straightforward and it describes the steps that the investor needs to take to purchase a membership interest in the deal. Often, this includes filling out a series of forms, signing several documents, and wiring funds to the appropriate place.
The exhibits section of the PPM can be thought of as an appendix of sorts. It contains all of the necessary supplemental information necessary to support the investment decision. For example, the exhibits could include things like copies of investment contracts, detailed proformas, financial statements, business plans, organizational charts of the investment company, and required licenses.
As the introduction to the article suggests, the PPM is just one of several legal documents provided to prospective real estate investors. Other potential documents include:
Other documents may be included as needed, based on the specifics of the deal.
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Real Estate Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.
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