Reading an Offering Memorandum: What to Check First

An offering memorandum (OM) is the marketing package a seller's broker prepares for a commercial property. It is useful and it is persuasive, and those are different things. Read it to find out what to verify, not to find out what is true.

This is a general guide, not investment advice. Get professional advice on any specific deal.

Start With the Rent Roll

The rent roll lists every tenant, their space, their rent and their lease dates. Check:

• Lease expirations. Several leases ending in the same year is a concentration of risk, however good the tenants are.
• Who pays what. Under a NNN lease the tenant covers taxes, insurance and maintenance. Under a gross lease the landlord does. Two buildings with the same rent per SF can produce very different income.
• Vacancy. Empty suites should be listed as empty, not left out.

Net Operating Income

Net operating income (NOI) is income minus operating expenses, before debt service. Ask whether the figure in the OM is actual (trailing twelve months) or pro forma (projected). Pro forma NOI often assumes vacant space is leased at market rent, or that expenses fall. Neither has happened yet.

The Cap Rate

The cap rate is NOI divided by price. A building priced at $5,000,000 with NOI of $350,000 is offered at a 7.0% cap rate. Because it depends on NOI, a cap rate is only as good as the NOI behind it, so check which NOI the headline cap rate uses.

Expenses That Look Too Low

Compare the expense lines with similar buildings. Watch for:

• Property taxes that have not been adjusted for the reassessment a sale can trigger
• Management fees left out because the current owner self-manages
• Thin repair and maintenance budgets on an older building

Physical and Legal Details

The OM summarises the building, the site, the zoning and parking. Confirm them independently. Zoning in particular decides what the property can be used for, and a summary is not a zoning letter.

Questions to Ask the Broker

1. Is the NOI actual or pro forma, and for which period?
2. Are there tenants in default, or leases being renegotiated?
3. What capital work has been done recently, and what is due?
4. Why is the owner selling now?

How CREXPERT.AI Helps

When an agent lists a property from its OM, CREXPERT.AI extracts the key figures and shows where each one came from in the document. As an investor you see structured numbers you can filter and compare across listings, instead of reading every PDF to find out whether a building is worth a closer look.