While the documents involved in a syndication may vary on deal-by-deal basis, we have outlined below some of the most common documents along with some key sections of each document. These documents will be furnished to you by the syndicator and may drive some key questions by yourself or your advisors (be sure to read our companion article 10 key items to review in a syndication).
The Private Placement Memorandum
What is it: The Private Placement Memorandum (PPM For short) is a document that discloses all the key information associated with a real estate investment. Some information in the PPM is provided as an overview with more detail given in the Operating Agreement.
Key Contents:
- Qualification of Investors: This section will describe eligibility requirements for the investment (e.g. accreditation), and in some instances how the syndicator may go about verifying such qualification.
- The Offering: This section will typically describe capital requirements, percentage allocations, shares, how the company will be managed, allocation of proceeds.
- Company Overview: Legal description of Company, registration state, organization date and address.
- Business Overview: High level overview of what the business intends to do in order to deliver profits.
- Manager(s): Who managers are, their powers, terms, and election.
- Compensation & Fees to Manager(s): A disclosure of the fees managers are earning on the deal.
- Management of Property: Disclosure of who will be managing the property and any costs associated with such management.
- Risk Factors: An overview of risks which may include Real Estate Risks, Operating Risks, Tax Risks, and Company Structure Risks.
- Projected Sources & Uses of Cash: An accounting of the source of funds, along with a disclosure of how the funds raised will be used.
- Distribution to Members: This section will cover how cash will be distributed from operations, or from sale, refinancing and/or termination of the company. It will also describe allocation of Taxable Income, Gains, Losses, etc.
- Conflicts of Interest: Disclosure of any conflicts of interests that currently or foreseeably exist.
The Operating Agreement
What is it: The Operating Agreement is a key document that articulates the internal governance of the company in which the investment is being placed.
Key Contents:
- Equity Structure: This section will describe Classes of Members (In a syndication there are typically multiple classes with the syndicator and investors each owning equity in a different class). The section will also detail out Membership Interest, Contributions and Capital Allocations and how profits, losses and distributions will be allocated.
- Management Structure: This section will detail how the company will be managed. A LLC may be member managed, or manager managed. Syndications will generally be manager-managed and this section will detail how managers will be elected, their roles and responsibilities, and lay out provisions for how they may be removed.
- Voting Rights: An operating agreement will typically alter a standard rule that members vote in proportion to their percentage interests. In a syndication, voting rights are typically reserved to the Syndicators and their class of shares.
- Books and Records: Establishes how books and records are to be kept, and members rights to inspect/audit the aforementioned.
- Transfer (Or Restrictions on Transfer): Establishes the mechanism in which transfers can be conducted, and establishes any restrictions on transfers.
- Termination: Establishes under which conditions the company may be dissolved and terminated.
The Subscription Agreement
What is it: An agreement between the entity and the investor for the purchase of interest in the entity.
Key Contents: The agreement sets the terms for:
- Purchase and sale of units
- Closing and Delivery
- Representations and Warranties (Both company and subscriber)
- Limitations of Transfer
