Key Parts of a Real Estate Offering Memorandum

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A real estate offering memorandum (also referred to as equity offering package or investment memo) is used by sponsors, developers, and other real estate professionals who raise money to invest in projects. Simply stated, an offering memo is typically a watered-down summary of a private placement memo.

In some cases, the offering memo is an investor’s first impression of an investment opportunity and management team. As such, the memo should be comprehensive and paint a full picture of the deal and management team.

Why Are Investment Memos Important?

A well-written, accurate investment memo benefits both the issuer and the investor. Investors use memos to attract certain partners for real estate projects that require high amounts of capital. This allows the company to be more selective when it comes to choosing a funding source.

For investors, memos are essential because they provide a detailed overview of what to expect from the investment. Investors use this information to perform due diligence and determine risk – helping them make an informed decision about the investment.

What information should be in a real estate offering memorandum?

A real estate offering memorandum should include the following sections:

  1. Executive Summary
  2. Investment Highlights
  3. Property Description
  4. Market Overview
  5. Value-Add Strategy/Business plan
  6. Pro Forma Valuation & Investor Returns
  7. Investment Structure/Timing
  8. Investment Risks/Considerations
  9. Sponsor Background

Before distributing content, work with an attorney to craft disclosure language that can follow the memo’s cover page.

Executive Summary

When an investor decides to invest in a real estate opportunity, an investor must get comfortable with the investment opportunity and management team. The executive summary should provide a snapshot of the entire offering memorandum. It should include:

  1. Basic property information
  2. Value-add or development summary
  3. Estimated returns
  4. Equity requirement
  5. Syndicate structure (promote, fees, sponsor contribution, etc.)
  6. Target hold period
  7. Estimated closing date
  8. Investor indication of interest deadline

This information can be easily displayed in a simple, clean table. Make a note of management team experience and the lead firm’s strategy.

In addition to a summary table, a “sources and uses” table should be included to clearly display the capital structure of the project. This table should break down the “sources” of capital into debt, equity, and any other source of monies (grants, mezzanine debt, etc).   The “uses” of capital can be divided into property, renovations, closing costs, acquisitions fee, reserves, etc.

Investment Highlights

Use the investment highlights section to sell the deal. Briefly describe the firm’s investment strategy, and dive into a highlight reel. Describe the great location of the property and opportunity to increase rent through value-added improvements. Summarize the major employers and amenities in proximity to the property. Discuss macro-economic factors that have the potential to increase rent in the future, including job growth and population migration. Write about the upside potential associated with the value-add strategy and summarize the value-add plan.

Be creative with paragraph headings as they can be used to highlight the investment potential. Consider the following:

  1. Attractive property in good location
  2. Opportunity to add value through targeted enhancements
  3. Substantial cash flow upside
  4. Improving macro-economic factors
  5. Experienced management plan
Property Description

The property description can be short and brief but should include a detailed look at the property’s components. Include the following property details:

  1. Name
  2. Address
  3. Current Occupancy
  4. Type (multifamily, retail, industrial, etc)
  5. Asset quality grade (A, B, C, D)
  6. Physical condition grade (A, B, C, D)
  7. Market grade (A, B, C, D)
  8. Units (multifamily) and/or square feet (retail, office, industrial)
  9. Unit mix
  10. Year built
  11. Parking
  12. HVAC (central air, window units, swamp coolers, etc)
  13. Amenities (gym, in-unit washer/dryer, leasing office, pool, etc)

Information can be summarized in a large table that clearly organizes the property detail. Include a page of photographs of both interior and exterior pictures. For a commercial property, include a lease abstract of the current tenants.

Market Overview

The market overview should be an in-depth analysis of the market characteristics of the subject property’s Metropolitan Statistical Area (“MSA”). This section should include:

  1. Key employers
  2. Market rent growth trends
  3. Occupancy trends
  4. Population data (median income, jobless rate, etc)
  5. Amenity map

Include pictures and graphs that are impactful to the market analysis. Consider creating a collage of major employers and their proximity to the subject property.

Add an amenity map that shows the proximity of nearby restaurants, grocers, community centers and employers.

Make a note of competing properties in the area. Optionally, include market rent and sale comparable properties in this section. Alternatively, consider including a market rent and sale comparable analysis in an appendix.

Value-Add Strategy or Capital Investment Plan

Some investments involve a value-add strategy or capital investment plan. However, all investments should have a business plan.

The intent of this section is to summarize your strategy for the property. As such, your plan should include an estimate of costs, timeline, and the impact of any capital improvements.

The components of the capital improvement plan should be summarized in a narrative. Include specifics about retrofits of the current space and new additions to the property.

Additionally, a table can be used to summarize the capital improvement plan and its costs. Some investors like to see the incremental return on investment associated with the capital improvement plan. Calculate this by comparing two deal scenarios with and without the implementation of the value-add strategy.

Consider including pictures, floor plans, or renderings of the capital improvement plan.

Pro Forma Valuation & Investor Returns

The pro forma valuation and investor returns section should include a summary of the property’s pro forma assumptions, risk, and estimated returns. In addition, include cash flow projections and the following metrics:

  1. Rent and expense growth
  2. Occupancy
  3. Cap Rate
  4. Cash on Cash Return (Yield)
  5. Internal Rate of Return (IRR)
  6. Total Equity Investment
  7. Total Return
  8. Equity Multiple
  9. Reserves
  10. Debt Assumptions (rate, amortization, loan to value)
  11. Debt service coverage ratio

Returns should be calculated for both the total project and limited partners, if applicable.

Use the data table function in excel to create a sensitivity analysis. Every investment will have different risks, and as such, will require a different sensitivity analysis.

Both returns and debt service coverage should be compared across varying conditions. For reference, see a list of common sensitivity factors below.

  1. Hold periods
  2. Sale capitalization rates
  3. Market growth rates and sale capitalization rates
  4. Construction budget/timeline
  5. Occupancy
  6. Operating costs
Investment Structure

Use the investment structure/timing section to describe the relationship between the subject property, sponsor, and limited partners.  Include the investment’s equity waterfall with an explanation of the promote structure. Be sure to cover the following topics:

  1. Distributions (timing and determination of what to distribute)
  2. Sponsor compensation
  3. Promote
  4. Fees (asset management, disposition, acquisition, etc.)

If the investment is within a real estate fund, describe the distribution rules. Consider whether or not the fund will distribute funds in an American or European Waterfall.

Additionally, include a summary of the financial reporting schedule. Discuss the property’s target hold period and any flexibility that the sponsor will retain in determining the investment’s duration.

Investment Risks/Considerations

The investment risks/considerations section should discuss downside scenarios that are out of your control and your mitigation plan.

For example, some risks might include:

  1. limited transferability,
  2. changes in capital markets
  3. rising capitalization rates
  4. weakening rental market
  5. overbuilding

Your mitigating plan describes the actions you’ll take to minimize investment risks.

For example, your mitigation plan might include:

  1. Strong location
  2. Historically high occupancy
  3. Low acquisition basis relative to competitors
  4. Strengthening market fundamentals
Sponsor Background

The sponsor and management team background section is typically at the end of your real estate offering memorandum. However, it is arguably the most important section.

A strong resume and experience with comparable projects will build trust in potential investors.

Start the section with a narrative about the management team. Include both firm experience and the key sponsor’s bios.

If the sponsor has “full cycle” deal experience, consider including the sponsor’s prior returns on investment. A full cycle deal is one that the investor has sold and distributed funds to investors.

What if you don’t have much experience?

Inexperienced sponsors should include information about the project’s property manager and their experience in the submarket.

Conclusion

A polished real estate offering memorandum is important for raising money. Investors expect it, and it’s an opportunity for you to show off your investment opportunity.

Include all of the components from this article, and you’ll be well on your way to creating a compelling pitch.

ABOUT THE AUTHOR
Tyler is the Founder & CEO of Bullpen. Before becoming obsessed with proptech, Tyler built a commercial real estate consulting practice that advised some of the largest institutional investment firms on their most important projects. Tyler uses the Bullpen blog to share ideas and resources with readers who will shape the future of commercial real estate.

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