A private placement memorandum (PPM) is an excellent tool to represent an organization’s imperative information for securing a legal and credible deal. It creates trust and rapport among investors.
As a real estate investor, you must seek out the best opportunities for making a deal because it requires a substantial amount of money in a single investment. This is possible only if you can clearly understand the company’s offerings.
Real estate investors must spare some time to understand private placement memorandums. Understanding them is crucial to know what a typical memorandum includes and what you should look for.
Keep reading to know what private placement memorandums are used for and what is included in a typical private memorandum.
- 1 What is a private placement memorandum?
- 2 When is the private placement memorandum used?
- 3 Significant sections of the private placement memorandum
What is a private placement memorandum?
It is a legal form offered by a private company that displays the details and disclosures relevant to private real estate offerings; also referred to as an offering memorandum or a disclosure document.
It includes all essential information required while you review an investment opportunity and decide to invest. It consists of the company’s financial statements, description of business operations, management details, objectives, terms and conditions, and risks associated with the marketed private placement.
Generally, offering memorandums are lengthy because they cover all the information an investor must know before making a deal. They are somewhat similar to prospectuses that are for general public issues, whereas PPMs are for private placement. PPMs cannot be marketed to the general public.
A PPM protects both parties involved in a deal. Investors stay aware of what they are investing in, and sellers get rid of liability related to selling unregistered securities. It is an opportunity for investors to secure funding and raise capital by selling their securities to other investors.
When is the private placement memorandum used?
The PPM is required when a business sells its securities for private real estate offerings. The possible private offerings are:
- Real estate investment fund.
- Private real estate investment trust (REIT).
Significant sections of the private placement memorandum
It has multiple sections to cover various aspects of the deal. Take a look at some of the important sections:
This part gives a brief introduction of the company and the investment details. The investor will get an idea of who they are investing with.
It gives more details about the property, investment, and investment offering.
This explains the general risks and specific risks associated with the investment potentially linked with property, local market, and tenant.
Estimated use of proceeds
It describes what will be done with the capital that is commonly used for a down payment, renovations, and closing costs.
Estimated sources and their uses
This section shows how much equity and debt will be raised. The amounts are then summed up to estimate the total sources of funds. The uses of these funds are also mentioned in this section.
It defines the minimum investment, expected investment term, expected return rate, and how the equity will be shared between offerors and investors.
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Description of the securities
Companies offer several types of securities. It explains what type of securities a company is offering and what that all means.
Funds location and timing
This section refers to the location of funds holding and its timing. It also addresses the additional options in case the offering is not fully funded.
Conflict of interest
This addresses conflicts of interest, if any, with the company and management team.
This section includes the details regarding tax matters and what tax documents will be sent to the investor every year.
Finally, this section explains what types of investors are suitable for the deal. This section may contain a questionnaire to determine the accreditation of investors.
It may take your time to understand all the PPM sections, but it will instill confidence in your dealing and prevent any issue regarding the deal.