Not all PPMs are created EQUAL

Greg Ehrlich, our newest partner at Kaliser & Associates PC, put together a high-level "gut check" on certain PPM (private placement memorandum) provisions. Every Company Agreement and PPM is different.

This article is meant to provide some additional insight to some of the more overlooked aspects of a Company Agreement/PPM that could significantly impact you as an investor.
 
How are distributions handled? Understandably, this is where many passives will first look. Are there multiple classes of Members? What is the split between the classes? Is there a preference to a certain class? Are operational distributions lowering your capital account (i.e. is it return OF capital vs return ON capital)? Prepositions mean EVERYTHING in a document!
 

• Capital Calls. What can trigger a Capital Call? Is it based on a certain amount of Member approval or is it in the Manager’s sole discretion? What is the impact of failing to contribute to a Capital Call? Is it merely dilution? Or do you become a “Defaulting Member” and lose your rights?
• Voting Rights. Are you even acquiring Voting Rights? Or are you merely acquiring distribution rights? Many agreements will dictate that a “Required Interest” of the voting ratio is needed for certain decisions. How do the documents define “Required Interest”? Typically, it means 2/3 of the voting rights, however definitions vary.
• Change in Management. How do I change the Management if I am unhappy with the performance of the company? Do we need the mortgage lender’s consent to effectuate a change in Mgmt? Typically, the change in Mgmt would be voted on by the Members with voting rights and need the “Required Interest” of Members to vote on removal. However, as seen above, the definition of “Required Interest” can vary. Also, let’s say there is a 50-50 (voting/sharing ratio) split between Class A (passive investors) and Class B (Manager/deal sponsor). If the agreement requires the typical 2/3 of the voting ratio for removal, it is unlikely the Manager will ever be removed by a vote of the Members, as the Manager is at the very least starting with 50% and not going to vote himself out. 
• Holding Period. How long is the anticipated hold time for the asset? Obviously, a plan to hold for 10 years vs 2 years will have varying impacts for each potential passive investor. Is it a value-add property or a cash flowing property?
• Early Cash Out. What if a passive investor needs their money out early? Is there a provision that allows passive investors to be bought out prior to the sale of the asset? Is the buyout price based on the initial capital contribution? Is it based on FMV at the time of the buy out? 
• First Distributions. Typically, these deals need at least several months before the Company is ready to start making distributions to its investors. Is the anticipated time before the first distribution 3 months? Or is it 2 years?

For free consult - reach out to team@kaliserlaw.com