One of the essential elements for any Private Placement Memorandum (PPM) is the Sources and Uses Statement. This is required PPM content by the Securities and Exchange Commission and is good business practice for any startup or ongoing business.

Simply stated, the Sources and Uses Statement is a table that shows where funds are coming from and what they will be used for. In a PPM, it shows the sources and uses of funds during acquisition of the property. The Sources and Uses Statement is particularly valuable for investors contemplating an investment because the statement paints a picture of how funds they provide will be used, and what portion of those funds are directly applied to the purchase, versus those spent on management fees and reimbursement/payment for other expenses. Note: Where the management fees exceed 15% of the amount raised from investors, the “load” is considered excessive.

Many people don’t realize this, but a Sources and Uses Statement can also be used as an ongoing tool to track cash flow sources, project needs and to determine how much, if any, remains for distribution to investors and management. Whether prepared monthly or annually, sequential Sources and Uses Statements provide a way to compare performance and spot trends.

Sources of funding for a commercial real estate project can come from:

  • An institutional loan
  • Management contributions from savings
  • Investor funds, which may come from IRAs, savings, or cash-out of other investments

Uses can include:

  • The purchase price (or down payment if using a loan) on the property
  • Pre-closing expenses
  • Loan fees
  • Closing costs such title, escrow, transfer taxes and fees
  • Utility or insurance deposits required by a lender
  • Capital improvements
  • Working capital and reserves
  • Loan payments
  • Taxes
  • Insurance
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A key point to note is that the amount of funds coming in (Sources) must equal the amount of funds being utilized in various aspects of your project (Uses).

 

 

 

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