The Importance of the Private Placement Memorandum (PPM) for Delaware Statutory Trust 1031 Exchange Investors

Betty Friant | CCIM, Senior Vice President, KPI | RHAWA Vendor Member

Key Takeaways:

• PPMs are part of all Delaware Statutory Trust Investments • PPMs provide investors a full picture of the overall investment, including the potential risks • PPMs include important information for investors including the

DST trust agreement, summary of third-party reports, lease agreements, and most recent property appraisal.

All Delaware Statutory Trust 1031 Exchange real estate investments must be accompanied by a unique Private Placement Memorandum (PPM) as part of its due diligence and marketing presentations. However, even more importantly, an experienced DST 1031 representative insists that all potential investors read thoroughly the contents of the PPM in order to get a full picture of the potential risks associated with the DST 1031 investment, and understand how the overall investment vehicle is structured.

“All accredited investors need to read the entire Private Placement Memorandum, paying special attention to the risk section prior to investing. IRC Sections 1031, 1033, and 721 are complex tax codes and therefore all investors are encouraged to consult their tax or legal professional for details regarding their individual situations,” said Dwight Kay, Founder and CEO of Kay Properties & Investments, a recognized expert DST 1031 Exchange investment firm.

Make sure to check out the current list of DST 1031 Exchange investment offerings.

What is a Private Placement Memorandum?

A private placement memorandum (PPM) is a legal document that can typically run more than 100 pages in length and provides a detailed summary of the offering that should include information on risk factors, financing terms, property and market information, sponsor background, and financial projections. The PPM includes exhibits might also include other important documents such as the DST trust agreement, subscription agreements, summary of third-party reports, lease agreements, and due diligence information like the most recent property appraisal.

Not surprisingly, the PPM is designed to protect both the buyer and the seller of the unregistered security in question. For example, buyers benefit from the PPM because it provides valuable and detailed information about the investment along with industry specific risks associated with the investment. From the sellers perspective, the PPM helps to protect the issuer or seller from the potential liability associated with an investor who was not happy with the investment’s performance. All PPMs also include a subscription agreement which is a legally binding contract between the issuing company and the investor.

In short, a PPM is a confidential legal article that is part disclosure agreement and part marketing piece. The contents should be descriptive in presentation, while not overly persuasive in wording. It must address external and internal risks facing the investment while

also highlighting potential opportunities for investors.

Why are Private Placement Memorandums Required for DST 1031 Exchange Investments?

The Securities and Exchange Commission (SEC) - an independent federal government regulatory agency responsible for protecting investors - and the Financial Industry Regulatory Authority (FINRA) - an independent, nongovernmental organization that writes and enforces the rules governing registered brokers and broker-dealer firms in the United States - consider DST 1031 exchange investments “private placements” and “non registered securities”. This means that all DST investments can only be sold to accredited investors through a FINRA registered Broker Dealer and registered representative as Kay Properties & Investments. It also means that each DST 1031 exchange investment must also be accompanied by a PPM for investors to read and fully understand the investment vehicle in which they are about to invest.

Pay Special Attention to These PPM Sections

While all sections of the PPM are important to review and understand, there are specific sections of the PPM that all investors should pay special attention to.

Risk Factors

Like all real estate investments, DSTs are subject to numerous risks not limited to the total loss of principal. These risk factors include those that relate to the general laws surrounding DSTs including limited management control, the need for investors to be able to bear the total loss of principal, and illiquid nature of DST investments. In addition, risk factors must also include those relating directly to the inherent nature of all real estate investments including how unforeseen situations such as hurricanes, earthquakes, floods, overall market conditions, and early lease termination of lease agreements can impact the investment’s performance.

Management

Because DSTs are passive investments, investors have very little influence over how each DST investment is managed. Therefore learning as much as possible about the company, and the individuals who will be responsible for the performance of the property is a critically important responsibility of each potential investor. The management section of the PPM should provide investors a thorough review of the company including how long it has been performing duties for DST 1031 exchange investors, the level of overall experience the company’s team brings to the table, and testimonials from former clients. Firms like Kay Properties are highly sought after in the DST 1031 space because of the firm's hyper-specialization in the market, its unique marketplace of DST investment real estate, and the years of experience its experts bring to investors.

Overview and Purpose

The overview and purpose section allows investors to review the sponsoring company, and examine how they will employ investors’ money. This section should also go over the sponsor’s market knowledge, planned operations, and overall due-diligence results and analysis. This part should provide investors an clear understanding of who the sponsor company is, what their investment objectives are, and what are their tactics toward achieving those objectives.

General Terms and Conditions

The terms and conditions of any PPM is one of the most critical sections investors should study and thoroughly understand before agreeing to invest in the DST investment. This section outlines exactly how the deal is structured, including the distribution policy and potential exit strategies.

Summary

PPMs are part of any DST 1031 investment, and every DST investor is strongly encouraged to review the entire PPM in which they may be considering investing. While reviewing PPMs can be a little intimidating, the industry has helped create standardized presentations of PPMs so that investors can quickly become familiar with the organization of the document, making it easier to review and compare each PPM.

Working with an experienced DST 1031 exchange representative can greatly assist investors review and understand important information in the PPM, and can be an incredibly valuable ingredient to better understanding each investment.

Contact Kay Properties today to learn more about PPMs. About Kay Properties and www.kpi1031.com Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market. Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over $21 Billion of DST 1031 investments.

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing. IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation. There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/ operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.

Nothing contained on this website constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. Securities offered through Growth Capital Services, member FINRA, SIPC, Office of Supervisory Jurisdiction located at 2093 Philadelphia Pike Suite 4196 Claymont, DE 19703.