A real estate offering memorandum is a document that’s provided to investors to present the necessary information on a property investment. An offering memorandum is used in various types of real estate transactions, so the information it provides will depend on the deal itself.
We’ll look at when an offering memorandum is used in real estate, what’s included in it, and what to look out for when reviewing a real estate offering memorandum.
When is a real estate offering memorandum used?
An offering memorandum is used in real estate investment transactions. This includes the sale of real property as well as securities sold in a private placement, such as with real estate crowdfunding.
The idea behind the offering memorandum is to provide the information a potential investor needs to make a decision on whether or not to move forward with an investment. This is often one of the first things an investor will review when looking at a real estate investment opportunity.
An offering memorandum is most often used for commercial real estate transactions, such as a retail center, industrial property, office building, or a multifamily property.
What’s included in a real estate offering memorandum?
The details provided in the document will depend on the type of investment and the type of property. However, the items you will commonly see in an offering memorandum include:
This is one of the most important sections of the offering memorandum. It will typically show the prospective investor historical financial statements such as revenue, expenses, and net operating income. There may also be a pro forma, which is a projection of how the investment is expected to perform in the future.
If the investment is for a specific property, this section may make up the majority of the offering memorandum. It will include basic property details such as the location, size, and number of units. There may also be further details on certain amenities or characteristics that are unique to the property as well as information about the local market. Depending on the property type, there may be demographic information, traffic counts, and nearby businesses.
Comparable sales and rent
An offering memorandum will often include a section that shows the sales price of comparable properties as well as rental rates of properties with comparable units. This is usually included to help justify the asking price or required investment amount and to show how the rents that are being collected at the property compare to similar properties in the market.
When it comes to a private placement, like crowdfunding or a private REIT, investors want to know about who will be managing the asset. This section may provide a description of the company, including when it was established and other assets the company manages. It may also provide details on the key people in the company, including the type and length of experience they have.
Terms of the deal
The offering memorandum may also discuss the terms of the investment, depending on the type of deal. If the offering memorandum is for the sale of a property, this may only include the sale price. If the offering memorandum is for a private placement investment, this will likely include a lot more information, such as the type of securities being sold, how equity will be split, how distributions will be made, and the anticipated length of the investment.
If the offering memorandum is for securities being sold in a private placement, it should also discuss the risks associated with the investment. This will likely include risks that are involved with any investment but may also have risks specific to the particular investment.
This is not an exhaustive list by any means. There may be more or less sections in a real estate offering memorandum depending on the deal.
What to watch for in a real estate offering memorandum
It’s important to remember that an offering memorandum is for a private placement, so the information it contains isn’t regulated and scrutinized the same as a real estate prospectus provided by a publicly traded company, and it may not have the same disclosure requirements.
This means that there could be some important information left out, and some of the details in the document could be a bit misleading.
The footnotes in an offering memorandum can contain some important information. This information could explain that there were certain numbers omitted from a calculation or it may reference data sources that aren’t the most reliable.
An offering memorandum will often include information about what the preparer expects the investment to do in the future. This could be for the coming months or the next several years. While it’s important to have a good idea of how a real estate investment should perform in the future, it’s important to realize that any financial projections or forward-looking statements in an offering memorandum are likely best-case scenarios. An investor should always do their own analysis to predict what future performance may look like.
Just about any investment can look like a winner when only the positive details are presented. Pay close attention to what information is provided and what’s not.
For instance, there may be financial details about the previous year as well as projections but nothing on how the property is doing this year. This may simply be because the year-to-date information hasn’t been put together yet, but it could also mean that there has been a significant drop in occupancy or an increase in expenses.
Also look at what information is provided on the management team. If the issuer of securities for a private placement doesn’t have any experience, they’re more likely to leave out details on their experience instead of stating that fact.
The Millionacres bottom like on real estate offering memorandums
An offering memorandum is a valuable tool for assessing real estate investment opportunities, but it shouldn’t be the only tool used. The offering memorandum shouldn’t take the place of conducting your own thorough due diligence before committing to an investment. Verify the details, calculations, and statements in the document, and conduct your own research. Remember, the goal of whoever is preparing the offering memorandum is to entice you to make an investment. It’s up to you to make sure the investment is right for you.