Well here I am on a Saturday evening (after being here all day) putting pen to paper (more like fingers to keyboard) coming up with my 2010 strategy of buying real estate. I plan on 010 being a good year with no plans to hit a grand slam but just trying to stay in the game with singles and doubles. I believe that the people who can stay in the game, whether Real Estate or any other business will be there to take advantage of the opportunities that are going to come up in the future, it’s times like these that make great people, Not when it’s easy. I just wish sometimes the thoughts from my brain translated easier to paper and then back up again to the reader’s brain. I am hoping by writing in my blog it will help loosen the wheels since I seem to have had writers block.

First I need to ask myself where are the opportunities going to be that I can take advantage of? I think the opportunities for the average investor will be in the residential market at least for the next 12-18 months. I believe this segment seems to have the  best risk vs. reward ratio with the lowest/easiest barrier to entry. I would love to sit here and say Commercial will be the play but for most people this will not be the case. I do expect that to change in the over the next 12-18 months as sellers (including banks) who need to sell sale which will set the prices the market is willing to pay. This has already happened in the residential side on the low and mid price points, upper end is still in for a hurting. The problem is right now the average buyer of the commercial is worried that if they buy today it will be worth less tomorrow and the sellers are holding on to hope that values will go up. On top of that the people who are out there looking to buy are having challenges getting attractive financing which is making it so less people can buy, Which allows the people who can are able to be choosier.

At some point there will be a clearing of prices until we hit and test the bottom. My business goal is to be prepared to take advantage of that opportunity when it arrives through buying, selling & holding onto these residential projects. These (commercial) deals out into the future will be bigger opportunities or the so called triples, home runs and grand slams of the business. At this time though the risk to me is not worth it and it is critical at this stage in the market not to take any unnecessarily large risks and that is why I am enjoying buying a flipping the residential homes. If any one of the homes loses money it will not be an amount that can’t be recovered from or the money tied up won’t change my life if we can’t sell. This is not the case on larger deals (for me).

So that leads me to where I am right now and right now I am ready to pull my hair out!( j/k sorta). Actually right now I am doing more than a business plan I am actually putting together the outline of the PPM or otherwise known as a private placement memorandum so the attorney can take that and do there legal mumble jumbo. Part of my plan this next year is to combine my money with investors so I can scale up what I have been doing. Up until this point I did not want any more money even though I get asked quite a bit to invest with me. I wanted to establish that it could be done with my money and it seems to be the case.

Back to the PPM

Here is an outline of some things a PPM should have that may help your attorney understand what you are trying to accomplish (remember don’t be a cheap ass and try to create your own. You should not create your own but you may want to answer some of these questions so you can give to your attorney to help you create a good one)

1)      Coversheet—A brief statement of

a)      contact information

2)      Summary of the Offering—

a)      This section contains brief bullet points with the highlights of the offering.

b)      Should discuss the terms,

c)       the structure of the company

d)      the purpose of the investment,

e)      management

f)       Distributions and compensation of management.

3)      Terms of the Offering

a)      the price,

b)       the length of time the offering will be open,

c)       escrow conditions,

d)      over-subscription,

e)       Maximum and minimum offerings.

4)      Description of the Business—

a)      Describe the project or the business. In a real estate context

b)      Describe location,

c)       improvements,

d)       neighborhood,

e)      occupancy,

f)       purchase agreement terms,

g)      financing, reserves,

h)      construction issues,

i)        environmental factors,

j)        management and

k)      Anything else which would be material.

l)        Identify matters which are the belief of management as opposed to observed facts. It is helpful to reference any appraisals, title work, studies and other due diligence matters, but it is not necessary to attach these to the PPM.

5)      Management

a)      Describe the management of the company and the experience of the principals.

b)      Disclose any negatives, such as prior syndications which have ended in bankruptcy or foreclosure.

c)       Describe all prior experience with syndications.

d)      Discuss all experience in the type of project being syndicated, as well as other real estate experience.

6)      Compensation of Manager and Affiliates—all compensation to managers and affiliates must be disclosed in detail.

7)      Financial Summary

a)      The PPM should contain financial forecasts or projections. These can be done by an accounting firm or by management. (some attorneys will tell you not to make forecasts)

b)      If forecasts are included, significant assumptions must be explained, after in the form of footnotes.

c)       Show perspective of the company and the investor. Most people like to see an internal rate of return for the investor (if you don’t know how to calculate this email me)

8)      Conflicts of Interest

a)      Describe any conflicts of interest which the issuer and its principals might have. This is a good place to describe conflicts

i)        The issuer’s law firm might have.

ii)       Are you going to compete in the fund by buying other properties?

9)      Investor Suitability Standards—Explain if it is it open to accredited investors only or (if under 506) can non-accredited sophisticated investors participate (this may dictate how much money you can raise).

10)   Sources and Uses of Funds—describe all the money coming into the project from the offering and how this money will be spent. Do this with both the minimum and maximum raise.

11)   Summary of Operating (or Partnership) Agreement Provisions—

a)       Summarize paragraphs concerning distributions of cash and allocations of tax items. Also consider summarizing paragraphs relating to withdrawal of members and restrictions on transfer.

b)      Discuss management issues; including any rights (or lack of rights) the investors have to participate in significant management decisions.

12)   Risk Factors—probably the most important part of the PPM because it will be relied upon by the issuer to protect itself from claims of misrepresentation and omissions of material information by the investors. The idea is to be as comprehensive as possible. The risks are two types:

a)      general and

b)      Specific.

c)       There is a broad statement at the beginning that it is a speculative investment. Some risks common in real estate syndications are:

d)     lack of liquidity in the investment (always true)

e)       risk from competition, both in the general market place and in the location of the property (almost always true)

f)       financing risk, (always true, even if the property has permanent loan, it will expire some day and rates might be higher or money harder to get)

g)       environmental risk, (always true, even if there is an environmental study, the engineer might have missed something or there could be a future spill

h)      lack of appraisal (unless there is a fresh MAI appraisal for the syndication)

i)         development risks (permits, wetlands, cost overruns, etc)

j)         dependence on manager’s activities (always true, what happens if something happens to the key people)

k)      conflict of interest

l)        foreclosure

m)    unreliability of financial forecasts

n)      Arbitration, if applicable.

Think of every possible doomsday scenario.

13)   Tax Aspects—should have some discussion although each investor must be counseled to seek his own tax advice. Explain basics of pass-through entity, passive activity rules, at risk limitations, tax allocations, depreciation assumptions, tax audits and other matters. Unless it is tax shelter syndication, no tax opinion is expected. The discussion would be much more detailed if it is a tax shelter deal.

14)   Subscription Agreement is important.

a)      It contains the investment representation of the investor needed for compliance with Rule 506.

b)      Also should include representation as to accredited status and residency.

c)       Provide signature page for operating (partnership) agreement. Investor should acknowledge receipt and review of PPM; disclaim oral representations and other normal contractual matters.

Ok time to get home. If you find this helpful please tell a friend and let me know also. If you have any questions you would like me to answer go to the interact page to ask it and I will try to answer ASAP.

Sincerely,

Curtis Gabhart