In a prior article we discussed what to expect before, during, and after the syndication investment process. On a few occasions in that article, we mentioned the Private Placement Memorandum “PPM”. You may also hear that term mentioned during other investment presentations. Reviewing the actual document can be intimidating. Therefore, in today’s quick snippet, in an effort to help you become a better educated and more empowered investor, we wanted to take the time and demystify the PPM – its key components, what to expect, and what to look for.

1. Executive Summary: This section is more or less a repeat of the investment summary that you were probably presented with during the investor presentation. This is where you can review a description of the property, information about the management team (aka GPs), target returns, and the business plan. This a great point to determine if the investment opportunity meets your investment criteria and ensure you ask any other questions you have of the management team…though if you have gotten to the point of reading through and executing the PPM, you have likely made that decision already.

2. Summary of Terms will include a break-down of the various share classes, typically split in Class A shares (LPs) and Class B shares (GPs). This is also where you can reference the ownership splits (e.g. 70% LP and 30% GP), the minimum LP investment amount, the GP’s co-investment share, waterfall structures, timing of distributions, and management fees and expenses.

3. Risk Factors: This section lists everything that could go wrong. Any investment comes with inherent risks. As we noted before, the only way to avoid risk is to not take one. Nevertheless, if you have any questions about any of the risk factors listed, you should feel comfortable asking the operator how they are mitigating those risks.

4. Operating Agreement – outlines the rules of the road on how decisions are made, voting rights, distributions, waterfall, capital call mechanics, etc.

5. Asset Management Agreement – will outline who (which legal entity) will perform asset management duties, what the asset manager’s responsibilities are, their compensation, etc. The asset manager will also handle member distributions and the annual K1s as well as provide the quarterly investor updates.

6. Subscription Agreement – where you will note how many shares you want to purchase. It is not uncommon for this section to also include the:

a. Investor Qualification Form – where you will designate your investment/accreditation status. As discussed previously, for 506C investment opportunities, a third party will perform the investor accreditation status validation.

b. W4 Form – which you will complete for distributions and tax reporting purposes.

c. Signatures – having read and understood everything, you sign, and you are now done!

We recognize this is a lot to digest. To make matters more complicated, the PPM is usually drafted by attorneys, i.e. it contains a lot of legal jargon as well as discussion of complex accounting topics.  Thus, if you have any questions, you should consult with your CPA and attorney and have them review the PPM too. As with everything else in life, once you go through a couple of PPMs, you will gradually become more and more familiar with the PPM and over time it will become more easily digestible. And that point, we can only say – congratulations – you have become a seasoned investor!

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Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.