How to Read a CRE Offering Memorandum (OM): A Step-by-Step Guide for Investors and Developers
Introduction
When evaluating a commercial real estate (CRE) deal, few documents are as important as the Offering Memorandum (OM). It’s your first deep dive into the investment opportunity, and learning how to read it correctly can make the difference between a great investment and a costly mistake.
This guide is designed for real estate investors, developers, brokers, and analysts who want to sharpen their skills in evaluating OMs. We’ll walk you through each section of the document, show you what matters, and flag common pitfalls to avoid.
What Is an Offering Memorandum?
An Offering Memorandum (OM), also known as a deal book or investment package, is a professionally prepared document created by the listing broker or property owner to market a commercial real estate asset to potential investors. Its primary purpose is to present a comprehensive overview of the investment opportunity, including key property details, financial projections, lease summaries, market data, and often the broker’s investment thesis.
While the OM is an essential tool in the initial evaluation of a deal, it is not a legally binding agreement. The figures, assumptions, and statements it contains are prepared to position the property in the best possible light. Investors should view the OM as a starting point—not a source of absolute truth. It’s common for OMs to include forward-looking statements such as pro forma financials or market rent assumptions that may differ significantly from reality.
Because of this, thorough due diligence is critical. Investors should independently verify the information in the OM through lease audits, site visits, third-party reports (e.g., appraisals, environmental assessments), and legal review. Understanding the marketing intent behind the OM helps investors remain objective as they assess the actual risks and opportunities of a deal.
Key Sections of an Offering Memorandum
1. Executive Summary
Property Overview: This portion introduces the basic attributes of the deal—property type, size, and location. It gives you an immediate sense of what kind of asset you’re looking at.
Asking Price and Cap Rate: Often prominently displayed, these metrics set the baseline for financial evaluation. Cap rate in particular signals expected yield and helps with quick comparison to market comps.
Investment Highlights: This section distills the key selling points. These might include below-market rents, value-add opportunities, or strong submarket growth. The goal is to frame the deal as compelling right from the start.
2. Property Overview
Address and Property Type: This section starts with the basics—where the asset is located and whether it's office, retail, industrial, or multifamily. These two variables alone can shape risk and return expectations.
Size and Age: You’ll typically find square footage, year built, and information on structural upgrades or renovations. Newer buildings may have fewer immediate capital needs, while older ones might offer more upside through repositioning.
Visuals and Layout: Site plans, aerial images, floor plans, and photos help you understand the structure’s layout and condition. These visuals also assist in evaluating tenant flow, signage visibility, and expansion potential.
3. Location Overview
Market and Submarket Data: This includes insights on economic trends, rental rate averages, vacancy levels, and absorption rates within the broader market and the specific submarket. Understanding these trends helps contextualize the property's performance and its competitive position.
Demographics: This data shows population size, income levels, education, age distribution, and consumer behavior in the area. Strong demographic fundamentals often indicate long-term demand and value growth.
Surrounding Developments: Information about ongoing or planned developments nearby can suggest future upside or risks. For example, a new office building could increase demand for nearby retail or housing—or it could create competition.
Accessibility: Look at how easy it is to get to and from the property. Proximity to highways, public transit, walkability, and access to major employment centers all play a role in desirability and tenant demand.
4. Tenant & Lease Information
Rent Roll Summary: The rent roll shows the tenants, their lease start and end dates, current rent, and rentable square footage. It’s essential for assessing existing income streams and lease diversification.
Lease Expiration Schedule: This shows when each lease ends. A cluster of expirations in a single year may signal future vacancy risk and cash flow disruption.
Major Tenant Profiles and Credit Quality: The OM often highlights anchor or major tenants. Understanding their creditworthiness helps gauge income reliability and refinance potential.
Occupancy Trends: Historical and current occupancy rates provide insight into how stable the asset has been over time. Declining occupancy may warrant closer inspection.
5. Financials
Historical Financials (T12): The trailing 12-month financials are the most recent record of income and expenses. Reviewing this helps validate the asset’s current performance.
Pro Forma Projections: The broker’s forward-looking financials show projected rent growth, expense changes, and stabilized NOI. These are useful, but should always be vetted with your own assumptions.
Year-Over-Year Trends: Analyzing trends in revenue and expenses helps you understand whether the asset’s financials are improving or deteriorating—and why.
Capital Expenditure Assumptions: Any required renovations, deferred maintenance, or planned improvements should be clearly itemized and factored into your financial model.
6. Investment Highlights
Value-Add Opportunities: These include physical renovations, re-tenanting strategies, or operational improvements that could increase income and property value.
Discount to Replacement Cost: If the purchase price is significantly below what it would cost to build the property today, that suggests a cushion of value.
Undervalued Rents or Space: Below-market rents or underutilized space (e.g., a vacant unit that could be leased or converted) indicate upside potential.
Submarket Growth and Momentum: High population or job growth, increasing rents, or new amenities in the submarket can support long-term appreciation.
7. Exit Strategy & Returns
IRR and Cash-on-Cash Returns: These financial metrics forecast total returns over the hold period. IRR captures time-weighted performance, while cash-on-cash evaluates annual income against invested equity.
Hold Period and Exit Cap Rate: This part of the OM describes how long the sponsor expects to hold the property and what cap rate they assume at resale. Conservative exit assumptions are typically more reliable.
Sensitivity Analysis: Some OMs present multiple performance cases—base, upside, and downside. This helps you understand how resilient the deal might be under different market conditions.
How to Analyze the OM Effectively
Cross-Check Assumptions
Don’t take the broker’s word for it. Compare rent assumptions, sale comps, and market trends using external sources like CoStar, Reonomy, or public tax records. Independent verification helps you identify whether the broker’s underwriting is realistic or overly optimistic.
Identify Red Flags
Aggressive Rent Growth: Be cautious of rent projections that far exceed historical performance or current market averages. Such assumptions can inflate projected returns.
Underwritten Vacancy: If the OM assumes near-zero vacancy in a submarket with higher averages, this could indicate overly rosy projections and a potential cash flow risk.
Deferred Maintenance: Look for signs of wear-and-tear or postponed capital projects. If not disclosed in the OM, these issues could become costly surprises post-acquisition.
CapEx Omissions: Ensure the OM accounts for necessary future improvements. Missing CapEx projections can distort pro forma metrics and mislead investors about total investment needs.
Ask Questions
Always go back to the broker with specific questions. For example, request the full T12 and rent roll to verify the financials and income stream. Ask for the basis behind projected rents—are they based on nearby comps or wishful thinking? Inquire about any known or planned capital projects that haven’t been disclosed, as these can significantly impact returns and operations.
Always go back to the broker with specific questions:
- Can I see the full T12 and rent roll?
- What is the basis for the projected rents?
- Are there any known capital projects upcoming?
Common Pitfalls to Avoid
Relying only on the broker's pro forma: Brokers often use optimistic assumptions to present the deal in the best light. Always build your own financial model based on verified data and conservative estimates.
Ignoring lease expiration clustering: If many leases expire in a single year, this could create concentrated vacancy risk. Staggered lease expirations offer more stable cash flow.
Overlooking structural or deferred maintenance issues: Don’t assume the property is in good condition just because it looks clean in photos. Always account for hidden costs revealed during inspections.
Not stress-testing your underwriting assumptions: Sensitivity analyses help you understand how changes in rent, vacancy, or cap rates impact your returns. Skipping this step can leave you exposed to downside scenarios.
Tools to Help You Read OMs Faster
Excel Models: Building or using standardized underwriting templates enables you to analyze deals quickly and consistently. This also makes it easier to compare multiple opportunities side-by-side. There are many great templates online, we reccomend the models from Adventures in CRE.
AI-Powered Document Extractors: Tools like Deco Base automatically extract structured data from PDFs, helping you skip the manual work and focus on analysis. They’re especially useful for high-volume deal flow.
Comps Databases: Platforms like CoStar and Reonomy allow you to pull recent sales and rent comps, providing third-party validation for OM assumptions. They’re critical tools for verifying market claims.
Conclusion
The Offering Memorandum is the gateway to evaluating any commercial real estate opportunity. While it’s packed with useful data, it’s ultimately a sales document—one that requires critical thinking, cross-verification, and detailed underwriting.
By learning how to break down each section, flag inconsistencies, and ask the right questions, you’ll make faster, smarter investment decisions.
Next Steps:
- Download a sample OM and practice your analysis.
- Build or refine your underwriting model.
- Consider using automated tools to save time on document review.
