Multi-family Syndication Offering Documents

Sam Henry

In any legally structured syndication, prospective investors should expect to see a professional offering package. This package will contain legal documents prepared by an SEC attorney that you must review and sign in order to invest.

There are three major documents that you'll receive in the offering package of a multi-family syndication. They are the: 1) Private Placement Memorandum 2) Operating Agreement and 3) Subscription Agreement. In this article we’ll take an in-depth look at these three documents, and discuss the key items to look for in each.

1) Private Placement Memorandum (PPM)

A PPM essentially tells the “story” of the investment. It gives investors a full understanding of the securities being offered and the company’s objectives. The PPM is the disclosure document that’s legally required by the Securities and Exchange Commission (SEC) for a private placement offering. The rest of the offering documents are exhibits to the PPM. Let’s take a look at what a PPM contains.

Summary of Offering

The name of the company for which membership units are being sold, the price of each unit, the minimum and maximum dollar amount that the company will raise. This section also mentions the date on which the offering commenced, the date by which the minimum dollar amount must be raised, and the date by which the offering will close - if the maximum dollar amount is not raised.

Important Notices

This section describes what exemption is being used (506(b) or 506(c)). It further explains that the securities being offered involve risks - in which investors must rely on their own examination of the company, its merits and risks of the investment. This section also includes the sponsor’s contact information so that prospective investors know where to direct questions.

Executive Summary

The Executive Summary provides a brief overview of the rest of the PPM content. Its summarized sections include:

  • Company Objectives - The name of the company that investors are purchasing membership interests in, the intentions of this company, whether it is newly formed or existing, and whether or not it expects to generate and distribute cash flow.
  • Company Info - Describes the type of entity, number of membership classes, the amount of equity owned by each class.
  • Manager - What entity or individual serves as manager of the company.
  • The Property - Identifies the property being acquired.
  • Offering Terms - Outlines the SEC exemption being used, the price of each membership unit, the minimum and maximum dollar amounts being raised, and the minimum investment amount required of a single investor.
  • Investor Requirements - Describes who is eligible to invest. In a 506(b) offering, only accredited investors and up to 35 sophisticated investors who have a pre-existing relationship with one of the sponsors can invest.
  • Location of Funds - Where investor money will be held before closing. Typically funds are held in a bank account in the company’s name.
  • Timing of the Offering - An overview of the offering timeline with important dates such as the start date, the date by which the offering must be canceled if the specified minimum is not raised, and the date by which the offering will close if the minimum is exceeded. This section also explains the Sponsor’s authority to extend or terminate the offering.
  • Use of Proceeds - A high level explanation of what the capital being raised will be used for. Proceeds are typically used to purchase, improve, operate, and ultimately dispose of the Property. Additionally, proceeds are used to reimburse the Sponsor for acquisition expenses, and to cover the acquisition fee.
  • Allocation of Distributions, Profits, and Losses - Explains how cash flow is distributed between membership classes.
  • Manager’s Compensation - Explains the different ways that the Sponsor is compensated. This includes expense reimbursements, fees, cash flow distributions, and carried interest.
  • Risk Factors and Conflict of Interest - An acknowledgement of the risks involved with real estate investments such as the lack of liquidity. This section also explains that the Sponsor may have a "conflict of interest" because they are receiving compensation.  
  • Liquidity & Transferability - This section warns investors that the investment is not liquid. Investors should be prepared to leave their money invested in the company for the entire hold period. The SEC prohibits investors from selling their membership interests within the first year of the investment.
  • Duration of the Investment - The period of time that your money will be "tied up" in this investment, also known as the “Hold Period."
  • 1031 Exchanges - This section explains to investors that they are buying membership interests in a company, and that you can’t do a 1031 exchange with these partnership interests. The only way investors are able to execute a 1031 exchange in a syndication is for the entire company (the LLC) to sell the property it is purchasing, and exchange into another property - or properties, of equal or greater value.

Suitability Standards

This section describes the requirements and restrictions of the securities exemption (typically 506(b) or 506(c)) that has been elected under this particular offering, and how they relate to investors in this offering. For example, in a 506(b) offering, general solicitation or public advertising is prohibited. Information about the offering must be communicated to investors privately - such as a private mailing list, and not through public platforms like social media. Another restriction mentioned here is that all investors must be either Accredited Investors or Sophisticated Investors. For Self-Directed IRA investors, the beneficial owners of the IRA must be either accredited or sophisticated..

Source and Use of Proceeds

This section typically contains a table that breaks down what sources of capital are involved in the deal and what that capital is being used for. The table may also show how the use of proceeds may differ based on how much of the anticipated capital the sponsor is able to raise. For example, if only the minimum dollar amount is raised, the sponsor may defer reimbursing themselves for their expenses, defer their acquisition fee, and even loan the company money to cover closing costs in order to get the deal closed.

Distributions to Members

Our objective in purchasing and operating multi-family properties is to produce cash flow that we can distribute back to investors. This section explains that this is our intent. It also explains that it’s up to the Sponsor to determine how much cash is distributed. It’s the Sponsor’s responsibility to ensure that there is sufficient working capital and reserves on hand before distributing cash out to investors. We believe that the viability of the property's performance comes first, and we do not want to ask investors to send cash back because the property is under-capitalized. This section also details how the preferred return (if applicable) factors into the cash flow distributions.

One very important aspect to verify in this section is that cash flow distributions are treated as a “return on investment” and not a “return of investment”.

The final parts of this section will outline the order by which capital is returned to investors in the case of a refinance or sale of the property.

Manager Fees, Compensation, and Expense Reimbursements

There are several ways that Sponsors are compensated. Each of the fees and reimbursements due to the Sponsors are outlined in this section along with a description, frequency, and amount.

Duties of the Manager to the Members

The Sponsors serve as the manager of the LLC that the investors are investing into. They have a fiduciary responsibility to:

  • Use their best efforts when acting on the investor's behalf
  • Not act in any manner adverse or contrary to the investor’s interests
  • Not act on their own behalf in relation to their own interests
  • Exercise all of the skill, care, and due diligence at their disposal
  • Make truthful and complete disclosures to the members

Risk Factors

The purpose of this document is to disclose all of the potential risk factors that may affect the investment. We’re legally required to disclose these "potential" risk factors. While you should be aware of them, also consider the many steps and strategies that we use to mitigate our risks.

A few of the standard risk factors you’ll see in any multifamily syndication are:

  • “The Company Has No Track Record” - The LLC that you are purchasing membership interests in has no track record. Our sponsorship team may have a strong track record but this specific LLC is new, therefore investing in it presents a risk.
  • “Risk of Not Receiving Any Distributable Cash” - Our primary goal is to help our investors create passive income streams; however, we can never guarantee that our projects will meet our cash flow projections. This disclosure outlines that the property could potentially underperform and the Sponsor may decide to pause distributions - in efforts to protect investor capital. For example, during the early months of the COVID-19 pandemic, we decided to proactively pause investor distributions as we monitored our collection rates in the wake of widespread job losses. Fortunately, collections were not severely impacted and we were able to resume distributions shortly after.
  • “Due Diligence May Not Uncover All Material Facts” - We go through a lot of effort to investigate all aspects of an investment opportunity before offering it to our investors. We employ the assistance of experienced vendors to make sure "no stone is unturned" during due diligence; however, there’s always a potential for items to be undiscovered. There’s also a potential that a seller intentionally withholds information in order to get their property sold.
  • “Limitations on Use of Passive Losses” - We employ strategies such as Cost Segregation and Bonus Depreciation to accelerate the depreciation of our multi-family properties. Doing so can create large “losses” for tax purposes although investors are receiving positive cash flow. These “losses” are considered passive activity losses and can therefore only be used to offset income from other passive investments. It can’t be used to offset earned income from a W-2 job, active business income, capital gains from your stock portfolio, etc. This is an area that you should discuss with your CPA for tax advice.

Investment Objectives and Policies

Objectives and policies that are outlined for a typical multi-family syndication include:

  • Acquiring, operating, and disposing of the property
  • Providing investors with a passive real estate investment opportunity featuring limited liability and cash flow distributions
  • Holding the property for a specific period of time until the property is sold, and the investor's capital contributions are returned
  • Dissolving the company upon sale of the property unless investors elect otherwise
  • Keeping investors informed with periodic financial status reports and annual tax forms

Federal Taxes

The PPM encourages investors to consult with their tax professional in order to determine the effects that the tax treatment of this investment will have on them. It then provides several general tax-related facts that investors should consider.

For example, the company is typically a partnership LLC. These are pass-through entities, meaning that instead of reporting income or loss at the company level like corporations do, the members of this LLC will report their pro-rata share of profits and losses on their personal tax return.

Another tax treatment disclosed in this section of the PPM is "Depreciation Recapture". When we use cost segregation to accelerate our depreciation, we are able to write-off large losses in the first year of ownership; however, this depreciation strategy may be required to be reported at the sale of the property, and could be taxed at a marginal tax rate that is higher than the typical long-term capital gains rate. The PPM will disclose what’s accurate based on current tax code, but tax law changes over time. So the actual tax treatment at sale could vary.

For Self-Directed IRA investors, the PPM discloses the possibility of owing Unrelated Business Income Tax (UBIT). Whether or not this tax applies to your investment is a topic to discuss with your CPA or tax advisor.

Signature Pages

Finally, the last page of the PPM is the signature page - which is to be signed by the Sponsors who are serving as managers of the company. The Sponsors are your partners and are working on your behalf to close the transaction, and execute the property's business plan.

2) Operating Agreement

An Operating Agreement is the governing document for company operations, and describes in detail the rights and duties of the members and the manager, how meetings and votes of the members will be conducted, how and when cash distributions will be made, where the company will keep their books and records, how disputes will be resolved, allocation and taxation of profits and losses, and how the company will ultimately be dissolved. This agreement is the legally-binding, enforceable contract between the LLC members and the LLC manager.

Much of the terms in the Operating Agreement have already been described in the PPM. What’s most important here is that the Operating Agreement is in line with what the PPM says. There should be no contradictions.

3) Subscription Agreement

The Subscription Agreement is a form that must be completed, signed, and submitted to the manager in order to invest in the deal. It requires investors to represent and warranty their qualifications and suitability to invest in the offering - in addition to the amount they are investing into the offering. Upon receiving an investor's signed Subscription Agreement, the Sponsor will add their signature to acknowledge and accept the investment.

Here’s what you’ll need to fill out on your Subscription Agreement:

Purchase of Units

The total amount of money you’re investing and the number of membership units that represents.

Accredited Investor Status

If you meet the SEC’s criteria of an “Accredited Investor”, then you will check a box to self-certify that.

Sophisticated Investor Status

If you are not an accredited investor, then you must at least be a “Sophisticated Investor”. You will check a box to indicate that you meet the SEC’s definition of a “Sophisticated Investor”. Generally, you’re able to claim this status if you have prior business experience, invested in real estate before (i.e. owned rental properties), taken a real estate course, or if you are being advised by a Professional Advisor who has this type of knowledge and experience.

Professional Advisors

If you are consulting with a Professional Advisor such as an attorney or CPA in your decision to invest, you will be asked to provide that person’s contact information and indicate if there is any relationship between the Professional Advisor and the company raising capital.

Acceptance of Subscription

You’ll be asked to enter your own contact information and contact info for any co-investor such as a spouse. Also in this section, you’ll be asked how you intend to to hold the membership units that you are purchasing. You may be purchasing them as an individual, as a company, in a trust, in a retirement account, etc. If you are purchasing as an LLC, you will be asked to provide a copy of your LLC’s Articles of Organization and a resolution signed by an authorized person authorizing the investment.

Offeree Questionnaire

You’ll be asked which state you live in, which state you pay income taxes in (this determines where state securities notices must be filed), your age range, job titles / positions you’ve held over the last 10 years that demonstrate your experience in financial and business matters, and the nature of your prior personal or business relationship with the sponsors.

Bad Actor Questions

If you are acquiring over 20% of the company’s membership units, then you’ll be required to answer several “Bad Actor” questions. A Bad Actor is someone who has been convicted of a crime involving securities fraud or other financial crimes within the last 5 - 10 years. People that have committed these types of acts are prohibited from raising capital and typically prohibited from borrowing from the government sponsored agencies like Fannie Mae & Freddie Mac.

Community Property Waiver

If you reside in certain states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) the membership interests you are buying by investing in the deal are considered the community property of you and your spouse. If you intend to keep this separate from your spouse, it’s none of our business but, you must fill out this waiver, have it signed by your spouse, and get the waiver notarized.

Your Receipt

The final page of the booklet is your receipt. After accepting your investment, the sponsor will fill out a receipt with a submission date, investment amount, number of units acquired, acceptance date, and their signature. We’ll then send you a copy of this page to serve as your receipt. Keep this signed receipt for your records. There are no membership certificates.

If the deal is oversubscribed, meaning that we have more subscriptions from investors than we have room to take in, then your Subscription Agreement will not be signed and any money you’ve wired to the company will be returned.


Now that you're fully educated on what to expect when a Sponsor presents a live investment opportunity! Although the offering documents can be quite cumbersome and tedious, we encourage all investors to read thefine print," and be informed on what the documents actually mean. We encourage investors to read these documents carefully and to ask us questions if anything isn’t clear. The better informed you are, the more confident you’ll be about your ability to make sound investment decisions.

Photo by Cytonn Photography from Pexels