Deena ElGenaidi
Published on:
August 19, 2021
min. read

Why an Offering Memorandum Is Essential in Commercial Real Estate

Before you decide to invest in a commercial real estate property, you need to know the terms of the agreement, and any other pertinent information about the deal. Essentially, investors need to see the offer being made and how they might profit from that investment. All information about the offering is included in a legal document called an offering memorandum.

What Is an Offering Memorandum (OM)?

An offering memorandum (OM) in commercial real estate is a document given to investors that includes all of the important information about a property investment. The purpose of the offering memorandum is to provide investors with all the information needed to make a decision about an investment. Often, real estate investments come in the form of private placements. A private placement is a private offering presented by a general partner or sponsor to a select group of investors. Both accredited and non-accredited investors can pool their funds to invest in larger deals. Private offerings should not be confused with REITs. Because of this context, an offering memorandum is also known as a private placement memorandum (PPM).

What’s in an Offering Memorandum?

While the information included in the offering varies depending on the type of deal or investment, there are a few items that are always included.

Details About the Property

In the case of property investments, an offering memorandum will always include information about the property. That information might cover location, size, number of units if it’s a multi-unit property, demographics and/or facts about the neighborhood. Everything an investor needs to know about the physical property will be included in the memorandum. “You always want to have your property description,” said Jake Ammon, Vice President at Addison Commercial Real Estate. “All the nitty gritty details, like how many doors, how wide and tall they are … the square footage of the building. If there’s multiple buildings, break that out further.”

A lot of the time, Ammon said, investors come in from outside markets, and “they’ve never seen the building before. And honestly, a few of them will probably never see the building, even if they buy it. And so that’s the kind of thing where we outline [the property] as much as possible.” Also included in those details is information about demographics, and in some cases, Ammon said, “household income in the immediate area.”

Financial Information

Also included in an offering document is all of the financial information about the investment or property. Any financial statements or info about expenses, profit and operating income should be a part of the PPM. Some PPMs could also include financial projections about how well a business or property might perform in the coming years, often determined by the debt-to-equity (D/E) ratio and various financial methods like quantitative analyses. Some things to cover, Ammon said, are “How much did it cost to run the property over the last 12 months? What are the expected costs and expenses? What do we expect to get in rent?”

Specifics of the Investment

Investors need to see all of the specifics about their investment. These details include terms of the agreement, how profits will be split, length of the investment and more, depending on the deal. Investors also need to know the minimum amount of money required to invest.

Information About Comparable Properties

Many offering memorandums will also include examples of similar properties as a way to predict potential profits and show sales numbers. These examples also help justify the prices of a property so that investors don’t feel like they’re paying too much.

Who Is Involved?

An offering memorandum also needs to be clear about who is involved in the deal, from investors to property managers. Depending on the type of deal and the specific memorandum, information about the players varies, but sometimes investors like to know specifics about everyone’s experience and background.

Any Potential Risks

Finally, before making a decision on the offer, investors need to be aware of any potential risks or losses involved in the investment.

Legal Agreement

An offering memorandum, in addition to providing all of the information about an investment deal, is also a legally binding contract. The final section of the memorandum is an actual copy of that contract, which an investor would sign if they agree with the terms of the deal.

Why Issue an Offering Memorandum?

An offering memorandum is important because it helps the investor fully understand the commercial real estate deal. Aside from being a legal document, the memorandum simply ensures everyone involved is clear on all of the terms. Also, because of the legality, the document requires all parties involved to hold up their end of the deal.

What’s the Difference Between an Offering Memorandum vs Prospectus?

An offering memorandum and a prospectus are similar in most regards, but while an offering memorandum is for private markets, a prospectus is for public markets. Both documents describe the terms of the offer, but most commercial real estate transactions fall into the category of “private market,” whereas the public market involves stocks and bonds.

An Example of an Offering Memorandum

At Addison Commercial Real Estate, Ammon said, they always “generate a professional-looking brochure, or offering memorandum” for all sales, leases and investments. “If we’ve got a site plan, or survey, or floor plans or anything, we’ll throw that in there as well,” said Ammon. For instance, when investing in a residential property, Ammon will generate a multiple-page brochure with all of the essential information included. For most sales and leasing, Ammon said, it’s a three-page brochure. International Metals Trading LLC has a great example of an offering memorandum.

When Investing in Commercial Real Estate, Always Read the Offering Memorandum

Offering memorandums are crucial for commercial real estate investment, if only to let you know all the important details of your deal. Before investing your money, especially if you’re investing in an outside market, you want to make sure you fully understand the details about the property, any financial information, potential risks and more. An offering memorandum will cover all of that information and serve as your legal document.