Syndication: Deal Structuring Secrets
A private placement memorandum is a legal document companies use to raise funds from private investors or venture capitalists. For real estate syndication, the deal structuring document outlines the terms of the investment opportunity.
Watch Seth Bradley, Esq. discuss PPMs in great detail on Episode #59 of our Royal Investing-Strategic Growth Membership.
Summary Of The Offering In Syndication
The Summary of the Offering refers to a crucial section of a PPM. It's used in real estate syndication to give potential investors an overview of the investment opportunity.
The purpose of the Summary of the Offering is to provide:
- essential details about the project
- the investment structure
- sponsorship team
The Summary comes immediately after the cover page and the table of contents. It grabs the reader's attention and provides a concise overview of the investment opportunity.
Offering In A Real Estate Syndication PPM
An offering in this context refers to the opportunity for investors to purchase shares in a real estate syndicate and:
- amount of equity offered
- price per unit
506(c) vs. 506(b)
506(b) is a popular exemption for real estate syndicators because it allows for up to:
- 35 non-accredited investors
- an unlimited number of accredited investors
However, some limitations exist on how those non-accredited investors may learn of the investment opportunity.
One significant aspect of 506(b) is that it prohibits general solicitation and advertising, which means you can only market the investment to people you have an existing relationship.
506(c) is another regulation used by real estate syndicators that allows them to solicit investment offerings to anyone without limits on how many accredited investors they can accept.
Unlike 506(b), syndicators using 506(c) advertise publicly and attract investors through various marketing channels.
Importance of "Use of Funds" In A Syndication PPM
The "use of funds" section is crucial in a real estate syndication PPM, as it outlines how the syndicate uses investors' money.
The "use of funds" section typically includes expenses such as:
- acquisition costs
- due diligence
- legal and accounting fees
- property management fees
Real Estate Syndication Private Placement Memorandum: Company Section
The "Company" section is a critical component that outlines important information about the company offering the investment opportunity.
The Company section typically includes the following information:
- General Company Information
- Goals and Objectives of the Company
- Management Team
- Roles and Responsibilities of Management Team
- Legal and Tax Structure
- Risk Factors
Key Elements Typically Included In The Management Section Of A PPM
The management section of a PPM document typically includes the following key elements:
- Roles and Responsibilities
- Decision-making Process
- Financing Strategy
- Exit Strategy
- Investor Participation
The management section is essential as it provides insight into how the syndicate:
- manages the investment
- who will be responsible for its success
- how investors can participate in the investment's operations
Private Placement Memorandum: Business Plan Section
The business plan section of a PPM outlines the syndication's investment objectives, strategies, and plans to achieve the set goals.
Below are the essential components of the business plan section:
- Market Analysis
- Investment Strategy
- Investment Property Description
- property type
- physical condition
- Financial Projections
- Exit Strategy
- Management Team
Deal Structuring: Fees Section Overview
A PPM typically includes a fees section, which details all the fees associated with acquiring, managing, and eventually disposing of the property.
This fee covers the expenses incurred during the purchase of the property. These expenses include legal work, due diligence, and other transaction costs.
This compensation goes to the syndicator or a property management company that oversees the property's day-to-day operations, including leasing units, maintenance, and repair work.
This fee covers the expenses incurred during the sale of the property.
Asset Management Fees
Asset management fees go to the syndicator for overseeing the investment and managing the property's overall performance.
Other fees may include legal expenses, accounting fees, and additional regulatory costs associated with the syndication process.
Distributions In A Real Estate Syndicate PPM
Different types of distributions can be included in a PPM, including:
- Preferred return refers to the fixed rate of return paid to investors before the general partners.
- Equity splits refer to how profits divide between the general and limited partners.
- Waterfall provisions specify the order in which profits distribute to different classes of investors.
- Capital accounts track investors' contributions to the investment.
It is essential to understand the different types of distributions included in a real estate syndicate PPM, as they can significantly impact the overall return of the investment.
Deal Structuring: Risk Factors
This section aims to disclose any material risks to potential investors so they can make informed investment decisions.
The section should divide into three categories:
- industry risks
- company risks
- risks related to securities
Industry risks pertain to risks that affect the real estate industry.
Company risks relate to risks specific to the company offering the securities, such as management and financial risks.
Risks related to securities are inherent in investing in the securities themselves, such as lack of market liquidity or regulatory changes.
Importance And Relevant Contents Of Investor Suitability And Qualification
This section helps protect the interests of both the issuer and investor by ensuring that only suitable investors who can bear the investment risks should participate.
To determine investor suitability, the PPM includes critical concepts such as:
- accredited vs. non-accredited investors
- suitability standards
- minimum investment requirements
- investment experience
Deal Structuring: Significance Of The Subscription Agreement
The subscription agreement section of the PPM outlines the specific investment opportunity offered to the subscriber. This section typically includes information on the following:
- investment objectives
- nature of the investment
- capital structure of the syndicate
- terms of subscription
- minimum investment amount
- payment frequency
The subscription agreement also outlines the rights and responsibilities of each party involved and may include the following:
- management of the project
- distribution of profits
- limitation of liability for both the syndicate and the investor
Importance Of The Operating Agreement: Syndication Private Placement Memorandum
The operating agreement is a crucial component of the PPM as it sets out the rules and regulations governing the operation of the syndication.
- Organizational Structure
- Distribution Waterfall Provisions
- Indemnification Provisions
- Profit Sharing Arrangements
Other Significant Provisions
In addition to the above, the operating agreement should also address other significant provisions, such as the following:
- term and termination of the syndication
- transferability of investor interests
- buy/sell provisions
- restrictions on the syndicate manager's activities
Deal Structuring: Key Takeaways
A private placement memorandum (PPM) is a legal document companies use to raise funds from private investors or venture capitalists. It is an offering memorandum that outlines the following:
- terms of the investment opportunity
- securities offerings
- financial projections
Knowing how to navigate a PPM ensures you syndicate deals benefit you. Do you want to learn more about real estate syndication investing? Sign up for our weekly FREE Group Mentoring.