PPM is an acronym for Private Placement Memorandum. It’s a document drafted by a securities attorney on behalf of a syndicator or sponsor who is seeking accredited investors willing to pool their money for the purpose of investing in real estate assets identified and underwritten by the syndicator.
The purpose of the PPM is to outline for the investors all the risks associated with the investment, the terms of the investment relationship and the asset deal, and the backgrounds and bios of the syndicators or sponsors (sometimes also called operators) who will acts as general partners in the deal. Investors act only as limited partners, meaning they will not participate in the day-to-day operations of the company, and their financial risk will be limited to the amount of money they invest.
The PPM should outline the terms of the relationship between the investor and the sponsors of the syndication. It is where you will find out whether investors get distributions monthly, quarterly, or otherwise. It’s where you’ll learn whether distributions are discretionary or mandatory. You’ll find details about the exit strategy for the asset (the length of time the syndicator will hold onto the investment before it’s sold, whether it will be refinanced in the future, etc.). There are plenty of disclosures and other pertinent information also included. Essentially, the PPM is a risk outline document.
Many investors skim over the PPM or don’t read it at all, but this is a big mistake. Investors have been burned by not reading the fine print in this document. Imagine giving a large chunk of money to someone, expecting to receive monthly income from the investment, only to find out later that distributions are discretionary…and the syndicator decides to use the cash flow for something other than investor distributions. Knowing all the details allows investors to put their money only toward assets and deals that meet their financial goals.
If you can’t get excited about reading 100+ pages of what many might consider boring legalese and financial material, you can always hire a private attorney to do it for you. Your accountant can explain the financial ramifications of the deal. Your best bet is to find professionals who are well versed in securities law and real estate transactions. And any time a syndicator says something that is in conflict with the terms in the PPM, this should be cause for concern. When all is said and done, the PPM is the final word on the relationship between the syndicator and the investors.
