Reviewing a PPM - from investor point of view

[Jennifer McElliott]

Hi folks - just wondering if as an accredited investor, do you normally take the PPMs that you are considering to an SEC lawyer to review on your behalf?  and/or what other types of due diligence do you perform before engaging in the investment?

[Joel Owens]

Look at the operator versus a higher return. Experienced operators in the field have more knowledge usually to limit downside risk on a project. 

For investors to invest with me I have larger minimum requirements.

A commercial attorney should be able to review a PPM and comment for you. 

Decide as an investor if you want to invest passively in stabilized projects ( full preferred return right away but limited upside ).

Example would be a retail center a sponsor buys at market cap rates that is already performing.

A value add investment ( a 50% rented retail center for example) where preferred return in year one to two is minimal maybe 3 to 4 percent but then return goes up and equity growth on the back end.

A ground up development where the first 1 to 2 years there is no return until the asset is built and leased up and the a preferred return of 7 to 8 percent with great equity growth on the back end.

If you already make a lot of money then higher cash flow money today might not be your goal. You might prefer less of a return on the front end and more on the back end when maybe in future years the taxable income percentages become lower.

Look at the exit time horizon usually 2 to 5 years but sometimes 7 years of projects to see if it fits with how long you want the money in a project. If your money is 1031 exchange money then it complicates investment for the sponsor as the structure is different. Money sitting around from an accredited investor is often a cleaner deal for a sponsor.

I am doing a retail project with a new Costco going in for development and have some possible investors wanting to invest in my project. It's a ground up development so returns are not potentially starting to come in for a few years. Returns are NEVER guaranteed to an investor. If a company says that run very fast and away from them. The PPM should outline risk that is in any potential investment. This is why the sponsor just as much as the project itself is important.