PPM Checklist – Private Placement Memorandum Requirements

One of the most important jobs of a syndicator (and a private placement memorandum) is to educate and inform investors of everything regarding a deal. No one is going to throw money at a real estate syndication offering without understanding its structure, potential, risk profile, etc.

When dealing with private placement investments, investors will want to study a private placement memorandum. This document, sometimes called an offering memorandum, provides a detailed picture of the proposal. Perhaps even create a PPM checklist.

What is a private placement memorandum? Some confuse it with a marketing document, and others view it as a business plan. This is why syndicators have a tough time drafting a proper PPM. They often don’t understand what elements to emphasize for the investors or themselves.

Private Placement Memorandum Checklist

Use this as a basic checklist for what must be in a PPM:

• Notice of Offering
• Executive Summary
• Description of the Investment
• Investment objectives and Criteria
• Terms of Offer
• Investment Structure
• Financial Information
• Use of Funds
• Management
• Risks
• Conflicts of Interest
• Requirements for Investors
• Restrictions on Transfer

What Is Included in a Private Placement Memorandum?

If you want to learn how to start a real estate investment company, this is one of the first things to brush up on before moving forward.

So, let’s start with the character of the PPM, which might surprise you.

The Dual Nature of a Private Placement Memorandum

If you’re new to raising capital for a startup, real estate offering, or other investment, then chances are PPMs might still confuse you. In terms of purpose, a PPM is meant to do two things:

• Serves as a compliance document
• Serves as a marketing tool

It’s a very interesting concept since everyone understands that compliance and marketing are not only different areas but are rarely handled similarly. And yet, the PPM always does both, especially in real estate offerings.

First of all, it helps mitigate risk by clearly outlining the business plan, clarifying the offer, and going over all the details of an investment opportunity. Secondly, this document will eventually end up in front of potential investors. Therefore, the information can either encourage or discourage investors from funding the proposal.

Of course, it isn’t always easy to draft the best PPM when raising private capital for real estate. It’s a highly technical document that usually requires, at the very least, the guidance of a Reg D syndication lawyer to draft your private placement memorandum. Furthermore, to score high marks in both compliance and marketing, you need to strike the right balance. But that’s often easier said than done.

Now, a beginner syndicator may believe that the technical nature of the investment documents documents, such as the PPM, implies using complex legalese. That’s not really the case. The primary reason to enlist the services of a Regulation D attorney is to have someone capable of translating the complex legal jargon and make the document readable, engaging, and easy to understand from a potential investor’s perspective.

While this type of document may take a while to learn and master, know that it involves a combination of art and science to get it right.

Why?

There’s no ready-to-use model that works best for every type of real estate offering. All PPM documents will vary depending on the industry, audience, deal structure, and other factors, including any SEC exemptions you may or may not have.

Although this may still sound a bit discouraging for new real estate syndicators, drafting PPMs is something you can get to grips with over time. 

The more you practice, the faster you learn and the more knowledgeable you appear in your potential investors’ eyes.

But before going into a comprehensive checklist, there are some things you should keep in mind when structuring your PPM document. Here are some common pitfalls and how to avoid them.

Using the Correct Approach

First of all, there’s nothing wrong with getting some guidance when drafting your private placement memorandum (PPM). You’ll obviously need it if you haven’t dealt with this kind of paperwork before.

However, you should ensure you’re using reputable guides and sources.

For example, many software solutions exist today that pump out ready-made PPMs. In most cases, these are too generalized and might be too confusing to adapt to your particular needs.

Reducing the leg work can be enticing. After all, the faster you put a deal together, the sooner you can raise capital for your next one and keep growing the real estate syndication cash flow. But what do you think happens when you use a PPM farm-bought document that wasn’t thorough enough?

Say you have to prove the document’s value in litigation.

Let’s assume one of your investors wasn’t happy with the outcome of your work, perhaps you underdelivered, and they’re suing you. After the lawsuit lands on a judge’s desk, your PPM will be heavily scrutinized.

Did you overpromise? Did the document clearly outline the risks?

Did your investor lose considerably more than you made it seem possible?

You have to realize that not all investments turn out great. Some investors might come after you for trying to squeeze more money out of the deal and focus on the PPM. Simultaneously, your PPM is the best legal defense you have.

But if you simply use a standardized document and change the company and offer details, you risk leaving out many details and provisions that could matter in a court of law. Not to mention, details and specifics are what attract investors to an offer in the first place.

This brings us to another crucial aspect of PPM documentation. You risk litigation when not properly outlining and informing investors of the risks. But how candid should you be around this subject?

Very.

Most new syndicators tend to fear talking about risks with accredited investors. They want to raise capital and do the deal. Since everyone has a certain risk profile, it’s natural to be tempted to downplay things to secure an investment.

But pitching investors is also an exercise in honesty. If an investor doesn’t want to come in on a deal, that’s fine. There are other potential investors out there you can pitch to until you raise enough capital. The more information everyone has before signing on the dotted line, the fewer chances of getting involved in a dispute during the deal’s term or afterward.

With the general PPM overview out of the way, let’s go over the checklist of requirements you need to learn before starting to draft vital real estate syndication documents.

Main Topics of Discussion

In most cases, the absolute bare-bones outline of a PPM document should highlight the following nine key areas:

1. Summary
2. Company Overview
3. Terms of the Offering
4. Risk Assessment
5. Proposed Use of Proceeds
6. Waterfall Distribution
7. Financials
8. Management Plan
9. Taxation and Other Legal Matters

If you’re trying to raise money for a syndication deal, the above topics apply. All are highly relevant to accredited investors when buying private securities, regardless of their nature.

However, the information will vary from one scenario to the next. With real estate offerings, the tax section can be quite complex because you’re forced by the SEC to register the syndication under an LLC.

The Private Placement Memorandum Summary

What is in a summary section, or chapter, of a PPM document?

It’s supposed to offer a condensed but informative overview of your business, its management structure, and investment terms. The scope of the summary is to provide potential investors with enough context to decide if they’re interested in reading further.

As such, you should probably provide investors with a comprehensive summary of your business and the proposed investment opportunity. Describe the offer in material terms and inform investors about your current capital.

You can also use this section of the PPM to let interested parties know who can participate in your investment. According to the SEC Regulation D, you’ll most likely only be able to target accredited investors for your syndication. But exceptions could apply depending on what specific rules and regulations you register in your offer.

A summary of the risk factors is necessary before going into more detail later in the document. Lastly, you can use this section to inform potential investors about any documents they would have to sign to get in on the deal.

It’s worth noting that an executive summary section is not legally mandatory. However, most, if not all, PPMs feature this chapter. It’s one of the helpful marketing elements in a PPM and serves as a great intro to the brief.

Company Overview

Investors, seasoned or beginners, always want to know who they’re getting into bed with, so to speak. In most cases, investors take on the most significant risks and put up most of the capital in real estate offerings. Therefore, no PPM should exclude a section dedicated to the company’s structure, marketing plans, mission, and unique value proposition.

If you want to get investors lining up, you need to impress them first.

Similar to the executive summary section, the company overview PPM chapter is a marketing element. In fact, it serves more as a marketing tool than anything else since your company’s overview has little to do with compliance aspects.

Nevertheless, think of this as being as important as drafting your business plan. When you want to be successful, you need to create a tight plan. The same thing applies when raising private capital for real estate.

So, what is included in a private placement memorandum designed to land investors?

Here are some of the most basic requirements for the company overview section:

• Describe the primary business operations – current and future
• Present a target customer profile
• Describe the real estate sector you’re operating in
• Outline milestones and challenges
• Go over your process for finding lucrative real estate investments
• Explain the marketing plan going forward
• Provide investors with proof of past wins and profitable deals

Once investors know enough about your business, it’s time to educate and sell them on the securities you offer. In this case, it’s real estate syndication.

Terms of the Offering

Every investor needs to know exactly what they’re buying into and what they can expect in return. Keep in mind that just because someone qualifies as an accredited investor doesn’t make them a real estate expert.

Most often than not, you’ll be partnering up with investors who know very little about the industry. Thus, they might need some education on the challenges, risks, and potential opportunities.

The offering terms section serves towards your compliance and marketing goals. On the one hand, you’re informing potential investors of whatever the SEC deems mandatory. On the other hand, you can touch on the profitability of the offering

Here are some of the essential topics to cover:

• Revisit the investor requirements to join the deal
• Discuss the minimum and maximum investment amount per investor
• Present a brief risk profile
• Outline the liquidation rights and ownership percentages
• Clarify voting rights

When you’re done with this section, you’ll want to transition into discussing risk factors.

Risk Assessment

The SEC mandates that you fully inform both non-accredited and accredited investors of all the risks pertaining to your real estate offering. As this is a detailed section of the PPM document, it will probably take more time to draft than the rest.

However, it’s essential to remember that while you can frame it in a positive light, you shouldn’t risk lying about any of the risks involved.

Note that during negotiations with potential investors, the risk assessment comes up more than anything else. Therefore, as you create this section, you’ll want to prepare answers, strategies, and plans to mitigate any type of risk.

Furthermore, remember that not all investors may understand the industry or the concept of syndication. Because of that, you’ll want to go into a lot of detail regarding the risk factors and challenges involved in getting the desired ROI.

Now, this section is usually split into three core categories:

1. Company risks

These are the risks your business takes on for participating in the syndication deal.

2. Industry risks

Here, you’ll usually present the general risk factors regarding the real estate industry that can cover everything from the difficulty of finding tenants to natural disasters.

3. Offering risks

This is the sub-section that most investors will focus on as it relates strictly to the investment opportunity in front of them.

For example, say you’re raising capital for a real estate syndication involving a Class B residential complex with 200 units. Risk factors that would affect the profitability could include things such as a highly competitive market or expensive renovations. Maintenance costs could be higher depending on the building’s age, and tenants might not have as many amenities as they want. Therefore, they could want to pay a lower rent.

As previously mentioned, these are deal or offering-specific risk factors that investors need to know to figure out if they have the appropriate tolerance factor for your proposal.

It’s crucial to keep in mind that you have to inform investors of all potential risk factors according to the SEC. This includes some of the general industry hazards that you might be tempted to overlook.

The risk assessment section deserves extra attention as it serves a dual compliance and marketing purpose.

Proposed Use of Proceeds

How are you going to spend money?

It’s one of the burning questions in any investor’s mind. Since you’re putting up less capital in a syndication deal and charge a finder’s fee, management fee, and are entitled to a share of the profits, investors need to see a clear spending strategy.

This is the section in which you’ll want to list and explain transaction expenses, potential renovation costs, and other costs.

Furthermore, you can use this section to indicate how the spending strategy will be used to mitigate some of the offering’s risk factors while also referencing the risk assessment section.

Again, this is one of those very deal-specific topics.

Profit Distributions

You’ve told investors who you are, your plans, the risks, how you plan to spend the money, and so much more. But they’ll also want to know what’s in it for them.

The profit distributions section is the chapter dedicated to the description of your syndication waterfall. Here is where you outline the profit payment structure starting with the different stages and investor classes.

You’ll want to be clear on the thresholds or milestones that would entitle you to a larger share of the profits.

It’s also crucial to inform potential investors of any delays.

Some real estate syndication deals don’t start paying out preferred returns right away. They can take one or two years until payments start rolling out if the property in question needs extensive renovation before it can be rented.

Furthermore, you should specify your management fees and any other factors that entitle you to a share of the profits.

After you finish going over the cash flow distribution plan, you should also talk about liquidation. As a general rule of thumb, real estate syndications are not lifetime or long-term investments. Many of them have terms shorter than a decade.

This means that cash flow isn’t the only source of profit for syndicators and investors. Once the term is complete, the syndicator will be tasked with selling the property. As is the case with most of them, these properties appreciate in value over time, especially after doing some renovation work, solid maintenance, and proving the asset’s profitability.

Therefore, you should provide a clear distribution plan for the asset’s liquidation or sale profits.

Financials

Everyone would assume that having the capital to make an investment entitles them to some financial information regarding the company they’re investing in, or in this case, the business that drafted the real estate offering.

Not only is that a matter of common sense, but it’s a matter of law. You can’t be shady or secretive about relevant financial information regarding your syndication company.

Investors need to visualize and understand your track record to make an informed decision. They’ll want to know if you’ve proven yourself capable of returning the promised ROI on previous deals if you’re not leveraged with debt and many other details.

Consider touching on the following points in this section:

• Capitalization
• Forward-looking statement
• Historical financials
• Profitability timelines
• Any declining metrics
• Financial risks

For this last part, you can cross-reference the previous risk assessment section.

The idea is to give an honest and detailed overview of your financials. Of course, this might prove challenging, especially if you don’t have many syndication deals under your belt. But this is where a real estate syndication attorney can advise you.

They can provide you with an approach that is both SEC-compliant and doesn’t deter investors due to lack of experience.

Management Plan

Some syndicators work alone and maybe do one or two deals at a time. But if you want to build real wealth, you have to do more. In this case, you have to transition into creating a syndication company, hire staff, and develop an infrastructure that can manage multiple investors and deals.

The management section of the private placement memorandum is often highly detailed. It outlines all the individuals in your company involved with the offering. It should also mention and describe the purpose of any third-party business that you enlist to help you manage the asset once you close the deal.

• Background information
• Track record
• Experience
• Wins
• Failures
• Compensation plans
• Conflicts of interest

These are some of the aspects you should feature in the PPM regarding management.

To beef up this section, reference more specifics about how you plan to manage the asset quarterly or yearly.

Regarding compliance, you must disclose all conflicts of interest.

Taxation

If you’re dealing with investors new to real estate syndication, odds are they’re not up to speed on how the government taxes property assets.

Note that some investors may not benefit from certain taxation brackets, in which case your proposal might not be in their best interest. This type of issue could lead to litigation if not fully covered in the PPM document.

As you become more experienced with this part of the documentation, you’ll soon realize that while dull, it can be an amazing marketing tool. Everyone hires financial experts and accountants to handle their taxes.

But every investor can spot the benefits of investment-specific tax breaks, incentives, and exemptions that can help them make an even higher return on investment. Use this section as an opportunity to further emphasize the profitability of your proposal.

Additional Private Placement Memorandum (PPM) Drafting Tips

You shouldn’t fear the private placement memorandum. Sure, you can’t really hope to raise millions of dollars without drafting one for your potential investors. But the PPM is more than that.

It’s also a great way to ensure that you remain compliant and avoid huge fines, litigation, and a plethora of other legal troubles. Turning to a real estate syndication lawyer for help is a great idea when you’re trying to build your syndication business.

Don’t think of it as a means to outsource the work. Take it as a learning opportunity to work out the critical details that turn an average PPM into a great PPM document.

Another thing worth emphasizing is how there’s no one-size-fits-all approach. The chapters outlined in this article contain some of the most important elements of a real estate syndication PPM. However, depending on the specifics of your offering, you could break down these sections into two or three smaller ones or even add things that are relevant to your business and might not be for a tech startup, for example.

The Private Placement Memorandum (PPM) Serves You and Your Investors

There are many other ways of raising private capital for real estate. That said, if you’re targeting accredited investors and want to become a successful syndicator, learning to find your way around the private placement memorandum is almost mandatory.

This is the brief that keeps you compliant, helps you go after large sums of money, and allows you to market your offering. The latter benefit is not to be understated since traditional advertising is generally not allowed in many real estate syndication deals.

Use this guide, or any private placement memorandum (PPM) guide for that matter, as a starting point. Use it to navigate Reg D Offering rules, investor inquiries, and everything else while crafting a comprehensive and offering-specific PPM on every one of your future proposals.