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Real estate offering memorandums (OMs) provide prospective investors with information on investment opportunities. This article will focus on the brokerage OM (for listed properties), its major components, and how to extract essential data points during your investment due diligence.

Note: This article will NOT cover private placement memorandums for real estate investments (syndications).

What is a Commercial Real Estate Offering Memorandum?

Simply put, a multifamily real estate OM is a marketing materials package that offers potential investors information such as:

Investment highlights (or executive summary)
Property specs and floorplans
Unit/common area features and amenities
Rent comps and sales comps
Historical financial information and financial projections
Submarket/demographic/employment data
Property/neighborhood photography, aerials, and maps

This information should give you a high-level overview of the property and its position in the marketplace.

Offering Memorandum Purpose

It’s important to remember that a CRE OM strives to accomplish one goal—generate a solid first impression with potential investors. Brokers commonly email new property listings to their investor database. The OM can be a great tool to garner interest and help transition curious investors to touring the property and eventually making an offer.

An OM is, first and foremost, a sales tool. It is meant to accentuate the properties’ best attributes and upside opportunities for the next ownership group. It doesn’t delve into risk factors, weaknesses, functional obsolescence, or other negative project facets. It’s up to you to figure out the threats.

There’s always much filler, and with OMs often eclipsing 100 pages, knowing where the golden data nuggets lay may be overwhelming. Having spent nearly five years creating OM marketing materials on the sell side and working on the buy side while helping investors decipher brokerage marketing materials, I think I can provide valuable insight into where you should focus your time.

OM Crucial Sections

Let’s dive into some of the more enlightening sections of the OM (in no particular order).

Executive Summary

The executive summary is a high-level summary (usually from the broker) that tells the investment story. It generally won’t get very granular but offers a pathway for the next owner to succeed with some critical points as to why this vision is supported.

It’s essential to read this excerpt because the deal's winning bidder will likely buy into this vision. Understanding how the brokerage team positions the asset and how they’ll position it in the marketplace serves as an initial filter. If the project is well-received in the investment community, yet you don’t buy into the vision (while others likely do), it may not be worth sinking any more time into it.

A good example would be a commercial real estate deal ripe for “value-add.” The broker talks about the location, proximity to major employment centers, the finish levels, and what kind of rent premiums could be possible in a value-add business plan. If you are familiar with the location and aren’t as bullish on it and question if a renovation plan is feasible, offering a purchase price in line with the guidance may be challenging. You won't be competitive when most of your competition likely agrees with the broker and bids accordingly.

Property Details

A good OM should have a page or two dedicated to property specifications. The information should be nicely summarized and tell you important data points like:

Construction Year
Construction type and materials
System Specs (HVAC, plumbing, electric, fire/safety)
Zoning and jurisdiction
Major capital repairs/replacement (new roofs, windows, siding, plumbing, etc.)
Miscellaneous (# of parking spaces, # storage spaces, # of elevators)

A considerable benefit of this section is time-savings. Some of this information could be found online, but having it all in one central place makes it much more manageable. If you were buying a property “off-market,” it’d be unlikely you would get a nearly curated list of all relevant details bulleted above.

These items must be a great starting point for your due diligence checklist as you prepare to tour the property and assess capital needs. You’ll be able to spot any inferior construction materials that could cause problems and determine how proactive the current property management has been with CAPEX requirements. Before stepping onto the premises, you should gain a solid foundation on property specs and conditions.

Underwriting Notes

Financial information can be hit or miss in an OM. The most common complaint from real estate professionals tends to revolve around unrealistic proforma projects, unreasonably high IRRs, unrealistic financing terms, and never mentioning the potential risk factors. I’ve never seen a package where the investment metrics aren’t highly bullish.

I’ll be the first to admit that the brokers’ line-item projections should have little impact on your underwriting. However, I think the narrative behind the numbers is far more critical and is something you should focus on. In other words, who cares that the NOI increases by 20% in the broker’s proforma? A better question is, why do the brokers think the 20% increase is justified?

Numbers tell a story (albeit fictional), but similar to the executive summary, you should have a good idea if the broker’s narrative is realistic. Then, do your research and make your assumptions.

Ideally, you will receive financial statements, property tax data, and rent rolls from the broker and input this data into your underwriting model. The underwriting notes are the most insightful part of the financials section of the OM.

Underwriting Notes > Proforma Financial Projections

As an analyst drafting underwriting notes, I spent much time explaining the story behind big-time underwriting items like rent growth, rental concessions, vacancy, and property tax projections. I understood most groups would have a qualified property management team who could help estimate most expense line items, so notes would be limited here unless something was unique or “unordinary.”

For example, if a monthly repair and maintenance expense was 5x more prominent than any other month, it may be worth explaining why. Or if there was a positive insurance expense line, there was likely a claim at the property, and it’d be worth explaining what had happened.

Once I began looking at deals from the buy side, I appreciated thorough underwriting notes. It was nice to view the historical financials, look at the broker’s proforma, read their justification in the underwriting notes, and draw my conclusions.

Here are some examples:

Concessions: If I could see there historically has been concession loss at the property, the underwriting notes will shed light on the nature of the concessions, such as:

How many months are they currently offering residents
Why did they feel concessions were necessary

I could then look at comps to see if discounts are being offered and make my assumption (totally independent of the broker’s broker's assumptions).

Rent Growth: If I could see a decent rent growth trend in the historical financials, the underwriting notes will often show recent leasing trends (especially for previously renovated units) and more granular details that aren’t easily extracted from the T12 statements. I can take timely information, look at the longer historical property trends, review the overall submarket, and make a final proforma projection.

Property Taxes: OM underwriting notes usually do a great job summarizing how property taxes work in the state/county and the tax payment calendar. This is incredibly helpful if you’re underwriting a project in a submarket where you don’t have much experience.

In summary, the underwriting notes can give you much more clarity on why the broker is underwriting a certain way. It should be helpful and used with your research to make unique assumptions. You should never unquestioningly depend on the proforma numbers alone. They are meant to tell an opportunistic story, not to be considered a hard fact.

Rental Comps

Good brokerage teams take rent comps very seriously. They have subscriptions to the best databases like HelloData (see below), CoStar, and Axiometrics, and they will also call properties to verify rents, specials, occupancy, unit conditions, and premiums. Some brokers secretly shop the comps (posing as renters) to get the best information.

It behooves brokers to be the most knowledgeable in their markets; having the most updated and accurate rental information goes a long way in maintaining that superior knowledge. I’ve never met a broker in this department who takes shortcuts.

However, while I trust rental information in an OM package is accurate and timely (still verified), the actual property comps are often cherry-picked. Brokers will pick out a list of potential rent comps and then narrow it down to the properties that help “support the vision.” In other words, comparable properties with higher rents, less vacancy, and few concessions will be chosen over another property struggling to attract tenants.

My rule of thumb is to use the brokers’ comps. Again, the information is solid, and they generally are accurate comps. Then, find a handful of different comps to add to your rent comp analysis. That should give you a complete picture of the submarket and the rental income upside (or downside).

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Sale Comps: On the comps front, sales comps are also helpful, but I’d focus more on the following:

Price Per Unit
Price Per Square-Foot

If there’s a cap rate quoted for each sale, I would take that information with a grain of salt.

Property Nuance

Sometimes, deals have complicated components that are uncommon and perhaps a bit intimidating. As an analyst at a brokerage firm, I often dedicated a page or two to explaining nuance. I knew everybody interested in the property would ask about it anyway, so I would invest my time on the front end in researching, understanding, and explaining so that all groups could wrap their heads around it.

The nuance could be in the form of the following:

Property tax incentives (discounts, abatements, TIF, post-sale reassessment)
HOAs (ownership percentages, budgets, voting rights)
Assumable financing (any covenants or other unique requirements)
Unit affordability requirements (AMI rent thresholds, affordability expirations, etc.)

I can’t proclaim that all brokers will provide additional details on a project's rare and complex components. Many of the larger brokerage shops will take the initiative and explain upfront to help ensure groups are comfortable and willing to bid on the property.

Submarket Statistics

Brokers will highlight how the location excels nationally. It could be in areas such as:

Rent growth/vacancy rates
Education
Employment/wages/unemployment
Population growth
Affordability
Supply constraints

Be sure to compare the submarket to other cities nationwide to get a complete picture. Most cities excel in certain areas but could be dismal in other aspects. You won’t get the whole picture from an OM package, and you need to benchmark against other markets to gain a deep understanding.

Summarizing Real Estate OMs

While OMs are renowned for being unrealistic and often irrational, there is a treasure trove of time-saving information if you know where to look. I pointed out a few areas that add value to my commercial real estate property analysis.