The Basics
The Challenges
Real estate partnership investing poses unique challenges to today's sophisticated investors and financial advisors. The investment community acknowledges the potential of real estate partnerships to satisfy a broad range of individual financial objectives and provide superior returns compared with other investment forms. The partners in such real estate partnerships are entitled to know the approximate economic benefits they may receive before investing.
However, matching partnerships with financial goals and picking specific investments that will deliver superior performance, is often difficult and time-consuming.
Beyond sheer numbers, REPPs pose unique challenges due to their relative complexity. They can provide a variety of benefits (tax shelter, current income and capital growth) at different times and in varying proportions.
REPPs invest in a broad spectrum of real estate assets with unique risks and returns: office buildings, apartments, shopping centers, condominiums, mini-warehouses, hotels, motels, mobile home parks, land, participating and nonparticipating mortgages, federally insured mortgages, etc.
The Private Placement Memorandum (PPM)
Your primary source of information for a particular partnership investment is a disclosure document, the Private Placement Memorandum (PPM) — a somewhat comprehensive document that will run anywhere from 50 to over 200 pages.
If you have the time, read the entire document; otherwise, you can understand the transaction in as little as fifteen minutes by reviewing these important, but brief sections:
1. The cover page summary.
2. "Who Should Invest."
3. "Summary of the Offering."
4. "Prior Performance."
5. The "Investments" sub-section of "Investment Objectives."
6. Any section describing a special feature of the offering, usually referred to in "Summary of the Partnership." For example, "Repurchase Program."
Here are the reasons these six sections are required reading for a good understanding of the offering.
• Cover Page: Here you can learn the basics of the transaction and determine if it's the kind of investment opportunity you seek. Explained here are the total size of the offering, minimum investment per unit, general partners, proposed investment, partnership investment policy and objectives, and selling commissions and offering costs. There will also be a statement regarding the maximum leverage to be used by the investment group as a whole and on individual properties. If applicable, any special or unique provisions of the proposed investment will be described as well.
• "Who Should Invest": This section shows the minimum tests investors must meet to be eligible to invest. These tests, sometimes referred to as "suitability standards," state the minimum net worth and/or taxable income investors must have. In addition, the sponsor should describe the compliance process that will be used to assure the suitability standards are met.
• "Summary of the Offering": This is usually three to six pages and tells you virtually everything else you need to know. You'll find the partnership's investment objectives, unusual features, tax treatments, liquidation and cash distribution objectives, compensation of the general partner (lead partner or syndicator) and other salient investment characteristics like the use of leverage and the type of property to be acquired. Most of the remaining sections of the prospectus merely amplify or define, more carefully, the general statements on the cover page and in this section.
• "Prior Performance": If possible, you’ll want to invest with a Sponsor (Lead Partner, or General Partner), who has a proven track record. The "Prior Performance" section shows the Sponsor's past activities.
You will be able to identify their length of experience in business, the number of partnerships sponsored, the amount of capital raised, the total dollar value of properties purchased and sold, and the approximate percentage of the total represented by each type of property at the time of purchase. You'll also see information on the economic results of liquidated partnerships.
• Investment Objectives and Policies: You want to be sure the specific investment objectives of the partnership coincide with the Sponsor's prior activities and business experience. If the Sponsor is branching out to new investment areas, then beware. New skills take time to acquire - even if they are still under the general heading of real estate. The place to check is the "Investments" sub-section in "Investment Objectives and Policies." Here, you'll find a description of the type of property to be purchased, its status at the time of acquisition, preferred locations and management's methods and operating policies in the acquisition process.
• Descriptions of Special Features: Next, look at any section that describes unusual features of the offering. You can identify these features from your reading of the cover page or "Summary of the Offering." An example of an unusual feature could be a "Repurchase Program," where the Sponsor agrees to value partner ownership interests and make a repurchase offer, and the method should be clearly outlined. You won't have to read more than ten pages of the PPM this way, which is a real time-saver. You'll have an excellent idea of the qualifications of the Sponsor, the nature of the investment, compensation to the Sponsor, and any unusual or distinctive features. If you like what you've read, it makes sense to read the whole document. If not, then feel free to simply move on to others that may interest you.