An OM, or Offering Memorandum, is often the first and last substantive piece of informational content a prospective Buyer or Investor will run across when evaluating a commercial real estate deal. It is the first real piece of marketing material a Buyer can dig into, aside from maybe a broker blast email or listing page, as the OM is typically the cornerstone of a Broker’s listing package. The OM can also be the last thing a Buyer sees, as any proper Offering Memorandum should contain enough information for a diligent and savvy Investor to discern whether the deal fits their target parameters or is a pass, after which no further review is necessary. Additionally, if one can learn to read between the lines, Offering Memoranda contains valuable insight that can give you a leg up when competing with other Buyers, negotiating with the Seller, or quickly moving on to another deal.
As the title suggests, in this post I’ll share my “Top 5 Things to Look for When Reviewing an OM”. My hope is that by focusing on high-value areas of insight or information you can both streamline your review process and get a more accurate sense of the deal at hand. Offering Memoranda can vary greatly in terms of thoroughness, quality, accuracy, usefulness, and detail, but I’ll approach the five focus areas in a way that should remain applicable across a wide range of OM “flavors.” As I’ll discuss sometimes a lack of information or clarity can be even more useful than its presence if interpreted and utilized appropriately.
Before diving into each of the five focus areas, let’s dissect the basic anatomy of an Offering Memorandum and develop a roadmap to help navigate these documents. Of note, in this section I’ll be using generalized titles for various sections found in OM’s based on my own sample size and experience. At their most basic level, OM’s contain information related to a) what is offered for sale and b) how it is offered for sale. In the “what” category we find details related to property features such as unit count, acreage, MEP (mechanical, electric, plumbing) specifics, and locational context along with operational information such as financial data, rent and/or sale comps, and pro-forma assumptions. These “what” details are typically concentrated in a “Property Overview” section following the “Executive Summary” and in the “Financial Analysis” and “Rent/Sale Comparables” sections. Moving on to the “how,” outside of direct communication with a Broker or Seller, the OM is the best source for an Investor to understand the terms underlying the transaction being marketed. This information is usually found up front in the “Executive Summary” or “Deal Terms” sections. Every transaction is its own unique animal and every Buyer should understand the full context of how a Seller is proposing to transact. Are there certain rights that will remain with the Seller after a sale? Are there environmental or regulatory issues that need to be worked through which the Seller is attempting to hand off to the Buyer? Is seller financing on the table? These are all important considerations that can have drastic impacts on deal outcome.
Top 5 OM Focus Areas
1) High-level Deal/Property Fit: Before diving into the overly optimistic pro-forma financials or drooling over the rent comps, review major details such as price, size, condition, location, and deal type to make sure what you’re looking at fits within your acquisition parameters. This seems like common sense; however, I’ve had many Offering Memorandums run across my desk that turned out to be quick passes based on some basic feature(s) that went overlooked and were poorly aligned with our targets at the time.
2) Offering details and Executive Summary: Returning to the “how” of a deal discussed earlier, it is worth understanding what complexities or challenges may need to be overcome, even if the property checks all other boxes. Similar to determining high-level fit, a lot of time and energy can be saved by checking that the transaction structure or offering dynamics fit your specific investment appetite and resources. The Executive Summary also typically contains either difficult to quantify information or disadvantageous to the Broker/Seller to include in attention-grabbing bullets on the listing page or flyer. This can be a great place to uncover details that may increase or decrease a deal’s attractiveness.
3) Fit and Finish: Bear with me as this is highly subjective, but valuable insight can be gleaned by evaluating the overall quality of an OM package. Recognizing there is no “official” OM standards guide and that these materials deviate substantially based on deal size, type, and market (i.e., small RV park OM’s are mostly trash, aside from Axia’s, of course), if an OM feels shoddy, incomplete, or inaccurate this is usable information! For example, suppose a 150-unit apartment complex in a strong secondary market is marketed with an OM, which feels sub-standard. In that case, it may be a bum deal that better resourced/experienced Brokers have passed on, or it may be a great deal on which a hungry but green Broker got the listing. In either case, trust your gut, and if an Offering Memorandum feels lacking, more rigorous attention may be warranted when it comes to verifying assumptions, financials, and property conditions.
4) Pro-Forma Assumptions: This is my most and least favorite area to dig in on an OM. Most commercial real estate deals’ marketed pricing is predicated on the projected future financial performance posited in the pro-forma financial figures. These figures, in turn, are highly subject to the machinations of the individual determining the underlying assumptions. Before assuming ANY financial information contained in an OM is accurate or honest, read the fine print regarding the assumptions to gauge what version of reality the pro-forma is representing. Is vacancy assumed to drop from 20% to 5% in year-1? Is other income magically forecast to double when pet fees jump to $5,000/dog, and 80% of tenants are assumed to be dog owners? The devil is in the details, and nothing is gained by ignoring them or giving the Broker the benefit of the doubt when it comes to predicting the future performance of a property.
5) Comp Set Data and Accompanying DD: Along the same lines as evaluating the pro-forma assumptions discussed in the section above, Buyers should also do some of their own digging to verify the veracity of any rent and sale comps included in the OM. Comps can be difficult to come by, especially in smaller markets; however, cherry-picking comps can also paint a highly inaccurate picture in terms of what’s going on in a property’s given market. Similarly, it is critical to verify the occupancy, revenue, expenses, and other details contained in the OM by thoroughly examining the rent roll, property financials, and other supporting due diligence documents. A good rule of thumb – never enter into a contract in which earnest money becomes non-refundable or is even wired prior to receiving an up-to-date profit & loss statement and rent roll if they have not already been made available.
6) BONUS: A good Offering Memorandum and accompanying due diligence documents can make you feel like you have everything you need to wrap your head around a deal, however, ALWAYS establish a direct line of communication with the Broker and feel out their sense of the deal. I do not mean to make Brokers sound misleading or untrustworthy, but at the end of the day they are agents working on behalf of a Seller to close a deal at the highest price and under the most advantageous terms to the selling party. Brokers wouldn’t be doing their job if they didn’t put their best foot forward in presenting a property for sale, details be damned. With that said, in general the truth and all the valuable details that go along with it are much easier to extract from live conversation than from a prepared document.
Portfolio Manager - Director of Investment
Before joining Axia, David developed real estate experience at Everbank/ TIAA CREF in the distressed MBS trading unit and on one of Colliers market-leading investment brokerage teams. David brings a decade of financial services experience, working at Credit Suisse and Goldman Sachs within their Wealth Management and Hedge Fund Strategies groups, and an MBA from Vanderbilt.