Who reviews the Private Placement Memorandum

Question

Do you folks ask your attorney to review the PPM for an offering you are looking to fund as an investor? I have a 100 pg. PPM memorandum sitting in front of me, and it doesn't sound like the way I'd like to spend my weekend.

How essential is it to reviewing it in gory detail if the sponsor has a fantastic long term track record, you believe is very conservative and well capitalized. Thanks for commenting.

Jillian Sidoti · Answer

Hey @Andrey Y. - reading a PPM is a daunting task. I write several PPMs a week and when it comes to my own personal investing, I admit, even I don't like reading them.

So here are some tips to look out for:

1. Who is the principal? IS there more than one? What is their experience?

2. What are the voting rights of the investors? Be sure you are ok with none (I am as I am investing for truly passive purposes).

3. What are the distributions? This will be in the PPM and the OA. Make sure they match. Do the returns marry well with the proformas or potential cash flow of the property?

4. Are there any special risks?

5. Do the Use of Proceeds match up with what your expectations are on how your money is to be spent?

6. Do the fees to the management make sense? Are they inline with the interests of the investors?

Hope this helps!

Jeff Greenberg · Answer

I have been very surprised as to how many investors don't read the PPM.  As a syndicator, I have the pleasure of reading ours over and over with each draft as we work with our attorney.

As a potential investor it is important that you have clear indications of the risks, use of the funds, the operations of the holding entity, and an understanding of the sponsoring company.  There is a lot of important information that is there to help you make a informed decision on this investment.

Having a clear understanding of what is in this document, and the vetting of the sponsoring company are the most important tasks you, as a potential investor need to take on.  Once the documents are signed and the funds transferred, you will have a limited control over what is done to protect your funds, and/or the success or failure of the project.

I encourage my investors to read every page of the documents, and have spent hours answering every question that they have brought to me.  As you go through more and more of these, investors will see the patterns and the important sections to pay close attention too.  The document is there to protect you. The rest is up to you.

@Amy Wan @Jillian Sidoti

Andrey Y. · Answer

Wow! I think you hit that 10% dead on. I guess lots of green tea and wine this weekend. No fishing :(

Andrey Y. · Answer

Condescension much? Haha, I love it. So carefully reading it on your own would be okay? I am not sure if a $500 attorney fee would be worth it (just assuming the cost here).

Account Closed · Answer

@Andrey Y.  I would not pay an attorney to read it.  I also did not mean to be condescending.  To put a number to it, if the investment was less than 1% of my total assets I might not read every word.  If it was 10%, I would read every word.

Account Closed · Answer

@Andrey Y.     It is only as essential as you not losing your entire investment.  If you do not have to worry about getting zero returns then don't bother reading it.

Andrey Y. · Answer

Thanks much for the feedback. I did invest with that deal, and will be reviewing another PPM here in the near future :)

Amy Wan · Answer

Agreed with folks above. Reading a PPM for the first time is daunting. But once you've read a few, it gets really fast--you know which parts you can skip, and which parts are worth going through with a fine comb.

You should never feel rushed with investing. The PPM will say what the last date of the offering is, and whether it can be extended. Hopefully the sponsor approached you early enough in the process so that you can ask questions.

Lastly, with respect to fees, I actually just wrote a white paper on this. But i dont think I'm supposed to link back to my own company's page on BP. So... PM me if you want the link I guess.

Jeff Greenberg · Answer

As @Jillian Sidoti stated "6. Do the fees to the management make sense? Are they inline with the interests of the investors?"

There are many ways for a sponsor to be compensated.  We currently only take an acquisition fee(1-4%), a %(25-40%) of the cashflow after the investors get their pref return, and profit at sale(25-40%).  We also may also implement an asset management fee during the hold(1% of revenue).  There are many other fees a sponsor can implement.

Andrey Y. · Answer

Got it. Thanks Jeff! I guess I will take it as an investment in learning. If there is only 1 week or less to wire money to fund after the reciept of the PPM/OA, it doesn't seem like there is a lot of time for questions if I have any.

Thanks Jillian. Could you guys comment on the typical acquisition fee, obtain financing fee, management fee, and disposition fee you are typically seeing? It seems like the numbers are tight, deal is good, etc. But I have no frame of reference. As an investor, should we even care to what degree the sponsors are being compensated, if the numbers from our end are acceptable?

Who reviews the Private Placement Memorandum

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