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A Clear Guide to Private Placements

About This Guide

We’ve crafted this guide into three straightforward sections to help you, as an investor, understand the ins and outs of private placements in real estate:

  1. Understanding Private Placements: First, we explain what private placements are and how they operate.
  2. Key Terms and Examples: Next, we introduce some commonly used terms in real estate private placements and provide examples of their application.
  3. Commonly Asked Questions to Ask GPs: Finally, we outline critical questions to ask about the private placement itself, the market, the general partner, and the team implementing the business plan.

Understanding Private Placements

A private placement is like getting an exclusive invite to invest in a security or group of securities sold to a select group of investors, rather than being available on the public market.

This approach allows companies to raise capital more swiftly and with fewer regulatory hurdles.

It’s a favored method for securing necessary funds across various industries, including real estate.

Uber and AirBnB are a couple of examples of companies that started in private placement structures before going public.

Key Terms and Examples in Real Estate Private Placements

  • General Partner (GP): The entity or person managing the investment and the partnership.
  • Limited Partner (LP): That’s you, the investor who provides capital in exchange for an ownership stake in the partnership.
  • Regulation D: A set of SEC rules simplifying the process for private placements by offering certain exemptions.
  • Rule 506: A specific exemption under Regulation D that allows companies to raise unlimited capital from accredited investors.

For example, when a company identifies a promising property, the GP forms a limited partnership and offers LP interests to investors like you under Rule 506. The capital you and other investors provide is then used for the property’s acquisition, management, and potential renovation.

Commonly Asked Questions to Ask GPs

 
GP Overall Investment Strategy
FAQs
  • What’s the GP’s overall investment philosophy, and how does this fit in with their strategy?  Where do they see themselves going in the next 3 years?
  • Their general view of this industry, and trends that could be helpful or hurtful to this investment.  It is important that they talk about the positives and the negatives.
  • How many projects are they looking to do per year?  How many in the last 3 years?  
  • What due diligence do they provide for all their projects?  Hear first hand how they select each property. 

Team
  • What are the qualifications and track record of the GP and their team? How have their previous investments performed?
  • If Real Estate is about ‘Location, Location, Location’ – Private Equity is about ‘Manager, Manager, Manager’.  Asking about experience and past projects gives great color to how they will perform.
  • Past Track Record paints a picture about future results.  
  • Have they ever paused distributions?  If yes, why?  If no, ask what has been a recent major problem that your team had to address and walk me through how you solved it.  (Everyone has a struggle, I am looking for honesty, grit and hard work)
  • (It doesn’t hurt to check their LinkedIn and see if anyone you know knows them.  Ask if they have invested or ask if they would refer this person)

Market
  • What’s the local real estate market conditions in this location?  What does the last 5 years looks like and what are the key drivers for the next 5 years. 
  • Is the local economy instrumental to this investment?  If yes, discuss and listen for detail and clarity- not generalities.
 
This Project, Deal Specifics
  • Why do you like this deal? What are the details of the current deal?
  • What’s the projected timeline and exit strategy?  Who are you going to sell to?  What if that doesn’t work out? 
  • How do they aim to increase the property value (construction, operational execution – or anything unique and time sensitive that can drive returns) 
  • Feasibility study completed?  Any municipality challenges expected on a project like this?
 
How Does the GP Make Money
  • Acquisition Fee (1-2%).  How much are they personally investing?
  • Asset Management (Under 2%)
  • Splits (Are they incentivized to make more when LPs make more.
  • What does their Pro Forma look like.  Compare it to any others to see if comparable expenses are in line.  Do you agree with their pro forma?  Do you think it is too optimistic?  Change numbers and see what that does to the returns.
  • Red Flags: If GPs can be compensated no matter how the asset performs.  You want to see the LPs are paid before the GPs, and they make money on performance.  If fees are not easily outlined in the deck I would ask why.
  • Anything more nuanced ?  Construction Management, Property Management?  If yes, what is the cost and what is the profit model? 
 
How Can I Help You
  • It’s a partnership, not a transaction – If your background can be of any service to the project, both sides should dive in.  Cost savings, introductions, expert explanations in any avenue could assist with the project.
  • What time allocation are you wanting from them, what are they wanting from you.  Alignment upfront is always helpful.
 
These questions are key to making informed decisions when investing in real estate private placements. They help you understand the strategy, assess the market, get into the specifics of the deal, and evaluate the expertise of the team managing your investment.
 
 

Important Legal Docs

What is a PPM?

The Private Placement Memorandum is a detailed document provided to potential investors, outlining the investment opportunity, risks, and terms. It’s a critical component of the private placement process.

Key Elements of a PPM

A comprehensive PPM includes

  • Company background
  • Management team profiles
  • Detailed financial statements
  • Description of the securities offered
  • Use of proceeds
  • Risk factors

What is an Operating Agreement?

Operating Agreement

  • Definition – A legal document that outlines the management rules and member responsibilities of an LLC or partnership.
  • Purpose – Defines roles, decision-making processes, profit distribution, and procedures for meetings and dissolving the company.
  • Key Elements – Member roles, management structure, decision-making process, profit and loss distribution, and transfer of interests.

What is a Subscription Agreement?

Subscription Agreement

  • Definition – A legal document where an investor agrees to purchase securities from an issuer in a private placement.
  • Purpose – Formalizes the investment terms and conditions, including the amount and type of securities.
  • Key Elements – Investor information, investment terms, risk disclosure, payment details, and rights and obligations of both parties.

To sum up, this guide has provided you with a solid foundation in private placements, offering insights into key concepts, examples, and crucial questions to consider. With this guide as your companion, you can approach private placement opportunities with confidence and make informed decisions that align with your investment goals.


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