Why the Private Placement Memorandum (PPM) Is So Important

All Perch Wealth 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 for real estate investors. However, even more importantly, Perch Wealth insists that all potential investors thoroughly read 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.

It is crucial for all accredited investors to carefully read the entire Private Placement Memorandum, with a particular focus on the risk section, before making any investments. IRC Sections 1031, 1033, and 721 are complex tax codes, and for this reason, it is advisable for all investors to seek guidance from a tax or legal professional to understand how these codes may apply to their individual situations.

What Is A PPM?

A private placement memorandum (PPM) is a legal document that contains a comprehensive overview of an investment offering. It typically runs over 100 pages and includes information on risk factors, financing terms, property and market details, sponsor background, and financial projections. The PPM may also include exhibits such as the DST trust agreement, subscription agreements, third-party reports, lease agreements, and due diligence information like recent property appraisals.

The PPM serves to protect both the buyer and the seller of the unregistered security by providing detailed information about the investment, including industry-specific risks, to the buyer and protecting the issuer or seller from potential liability resulting from an unhappy investor. Additionally, the PPM includes a copy of the subscription agreement, which is a legally binding contract between the issuing company and the investor.

In summary, a PPM is a confidential legal document that serves as both a disclosure agreement and a marketing tool. It should provide a detailed and informative description of the investment, without using overly persuasive language. The PPM should include information on both the external and internal risks associated with the investment property, as well as potential opportunities for investors.

Why are Private Placement Memorandums Required for 1031s?

The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) consider DST 1031 exchange investments as "private placements" and "non-registered securities." As a result, DST investments can only be sold to accredited investors through a FINRA-registered Broker Dealer and registered representative such as Perch Wealth.

Additionally, each DST 1031 exchange investment must be accompanied by a PPM for investors to read and fully understand the investment vehicle before making a decision to invest.

Risk Factors When Investing

DSTs, like all real estate investments, come with various risks, including the potential for a complete loss of principal. Risks specific to DSTs include limited management control and the requirement for investors to assume the risk of total loss. Additionally, DSTs are typically illiquid investments. Other risks associated with real estate investments in general include natural disasters, market conditions, and early termination of leases.

As DSTs are passive investments, investors have limited control over their management. Therefore, it is crucial for potential investors to thoroughly research the company and its management team before making an investment.

The private placement memorandum (PPM) should provide detailed information about the company, including its experience in managing DST 1031 exchanges, the qualifications and experience of the management team, and testimonials from past clients. Experienced firms like Perch Wealth, with a focus on the DST 1031 market and a wide range of investment options, are highly sought after by investors.

Overview & Purpose on a PPM

The "overview and purpose" section of a private placement memorandum (PPM) gives investors an understanding of the sponsor company and how they plan to use the invested funds. This section should also include information about the sponsor's market knowledge, planned operations, and due-diligence results. This information should provide investors with a clear understanding of the sponsor's identity, investment goals, and strategies for achieving them.

PPM Conclusion

A private placement memorandum (PPM) is a vital component of any DST 1031 investment and it is essential for investors to thoroughly review the PPM before making a decision. While reviewing PPMs can be overwhelming, the industry has standardized the format of these documents to make it easier for investors to understand and compare different investments.

Working with an experienced DST 1031 exchange representative, such as Perch Wealth, can greatly assist investors in reviewing and understanding the important information in the PPM, and can be a valuable resource in making informed investment decisions.