How to make an Offering Memorandum for a real estate deal

Putting together an offering memorandum is an essential part of attracting investors and raising capital for a real estate syndication. 

The offering memorandum (OM) outlines the key details of the deal, and it's also referred to as a private placement memorandum. For investors - it serves as the key way for them to understand the deal.

In this article, we'll discuss what an offering memorandum is, why it's important, and what needs to be included to attract prospective investors. We'll also include tangible OM examples and share tips on how to improve your offering memorandum to make it more effective. Let's dive in!

What is an Offering Memorandum in Real Estate?

An offering memorandum is a document that provides prospective investors with detailed information about a commercial real estate deal. 

The purpose of the OM is to help potential investors make informed decisions about whether to invest in the project. It typically includes information about the sponsors, the track record, the investment property, the numbers and the potential risks involved.

Why Is a Commercial Real Estate Offering Memorandum Important?

An OM is important because it can help attract investors for your real estate project, giving them information about:

1. The team behind the deal
2. The property for sale
3. The investment opportunity

Importantly, it is a sales document that helps sponsors build interest in the investment opportunity by highlighting its key selling points.

Offering Memorandum vs. Prospectus

An OM is typically used in private placement offerings, while a prospectus is used in public offerings. 

The main difference between the two is that a prospectus is filed with the Securities and Exchange Commission (SEC), while an OM is not. An OM normally is a guarded document - for example is only shared with prospective investors who have been pre-qualified and signed a non-disclosure agreement.

Do you need an Offering Memorandum?

The use of an OM is not a legal requirement, but it is considered standard practice in the industry.

What to Include in An Offering Memorandum

There is no defined or legal way on what to include in an OM - but most OMs we see at GP Flow follow something like this:

#1. Introduction

The introduction should include some basic information, relevant disclosures and firm background. 

The title slide is the first page of the offering memorandum that typically includes the sponsor name, logo, a hero-photo of the investment, and a brief one-liner. Make sure it's clear what investors are looking at!

The disclaimer should then outline any limitations on liability or warranty for the information provided (i.e. information purposes only and not financial advice).

Lastly, include a simple firm profile before the deal including the team, experience, track record and any social proof or testimonials you have to instantly build credibility.

#2. Executive Summary

The executive summary is a most critical section of the offering memorandum that provides investors with an overview of the investment opportunity. 

It needs to be concise and compelling, highlighting the key investment highlights in bullet points so they are easy to scan - many investors will just rely on this page to make an investment decision!

The executive summary should tie in closely with the rest of the materials in the presentation and provide investors with a clear understanding of why this investment is unique and valuable.

#3. Business Plan

The business plan in the OM provides valuable information to potential investors assessing the forecast and risks of the investment. 

The plan should cover off the investment strategy and what are the key drivers of value creation that the sponsor plans to implement to achieve the targets. This may include strategies such as lease-up, renovation, repositioning, or other value-add initiatives. 

When pursuing a value-add strategy, you can also provide information on any specific improvements that will be to the property, such as curb appeal, washers and dryers etc.

Investors can normally pretty easily understand this stuff - so making it as tangible as possible can help them visualize the deal and its success.

Last thing on business plans, sponsors can sometimes go overboard on the capital investment detail, so it's important to keep it simple and high level - and direct investors to the underwriting model if they want to see line-by-line capital investment numbers. 

#4. Property Description

This section of the OM should include a detailed description of the property, including the number of units, lot size, and any relevant physical characteristics such as building size and age. 

In addition, it is important to provide information on the history of the asset, including when it was built, any renovations or upgrades that have been completed, and any key milestones in the property's history. This helps potential investors understand the physical and operational characteristics of the property.

High-quality photos and detailed maps can help investors picture the property and the surrounding area. 

An aerial map with key infrastructure builds credibility in the location - things like where is the closest Walmart, Starbucks or McDonalds.

#5. Market Overview

The market overview section should provide information about the investment's market area. 

This includes things like market size, major employers, growth rates, home prices, demographics, and other factors that can influence the investment.

#6. Pro Forma Financial Analysis

The financial analysis section of the OM is one of the most important parts of the document. It should include financial projections on net operating income, internal rate of return, average cash-on-cash returns, equity multiple, and other financial metrics.

Similar to the capital investment assumptions that are often included - sponsors can sometimes go overboard on the detail. Keep it simple with subtotals and direct investors to the underwriting model if they want to see line-by-line capital investment for the Pro-Forma.

Additionally to the Pro Forma, including an illustrative example for your target check size can help make it tangible for investors.

#7. Rent Roll & Comparables

The rent roll and comparables section of the OM should provide information on the current rental performance, pricing per unit versus comparable properties, and what the business plan is forecasting. 

This information can help potential investors understand how the investment is performing, and is expected to perform, over the forecast period compared to other properties. 

It's important to include information on the size, location, and characteristics of the comparables - for example, differentiating between bedroom count.

If a third-party management company is being used, it can be beneficial to include information about them. This builds trust and confidence in the team responsible for the day-to-day management and maintenance of the property, which is crucial for the success of the investment. 

#8. Risk Factors

The risk factors section of the OM is important because it outlines the potential risks associated with the investment opportunity. It’s not legally required to have this in the OM as is covered in the subscription documents and operating agreement.

If included, the section should provide a detailed analysis of potential risks, including market risks, financial risks, and other risks that could impact the investment's success. 

#9. Transaction Timeline

The last section of an OM should be the transaction timeline in the investment and contact details. 

An overview of the key milestones and deadlines associated with the investment, including due diligence and closing dates, give potential investors clarity on how they can participate in the deal.

Lastly, include clear contact details for the firm - show a picture of the key people, include your phone numbers, email address, and website information. Make it easy for potential investors to get in touch with you to ask questions, request additional information, or express interest in investing.

Managing changes to your Offering Memorandum

Information in the OM can change - and when it does it's important to use it as an opportunity to build trust, not damage it.

From the outset - ensure that the OM is as accurate and comprehensive as possible as making changes to the OM after it has been distributed can be challenging and time-consuming, and can also impact the credibility of the original numbers and overall materials. 

This is particularly important when it comes to financial data and projections, as even small changes can have a significant impact on the return numbers for investors. If changes are necessary, it's important to clearly communicate these changes to investors and explain the reasons behind them. 

This can help to maintain transparency and credibility, even in the face of changing circumstances

Tips to Improve Your Offering Memorandum

Consistent branding

While sponsors are real estate professionals - not designers - using consistent branding and design elements in the OM can improve its quality and professionalism. 

A consistent layout, color scheme, and company branding creates a cohesive and professional look that helps to differentiate the property and firm from others on the market. 

Using a template or getting a third party agency to help you as a well-designed OM can be a powerful marketing tool and make a positive impression on potential buyers.

Clear Writing Style

One of the best ways to improve an existing offering memorandum is to improve how it's written. 

This could include removing run-on sentences, making sure grammar is correct, using short paragraphs that are easy to read, and using bullet points to highlight key information. 

Ensure the Financials are Easy to Understand

Investors make decisions when they feel confident and informed - so ensure your numbers are easy to follow and simplify things wherever possible in the OM.

For investors that want to dig in - keep all the details in the underwriting model, ensure it makes sense and is easy to follow.

Quality Photography and Maps

Including high-quality photos and detailed maps can help investors visualize the investment opportunity. Make sure to use professional-quality images and maps that are easy to read and understand. 

Case Studies and Social Proof

Incorporating case studies and social proof in the OM can help to build credibility and demonstrate that you know what you’re doing. This can include highlighting the successes and achievements of the firm and including testimonials from previous clients. 

The Bottom Line

Creating an attractive and exciting investment case is essential for attracting investors for your real estate project. 

With the right deal and expertise, we hope these tips help you create a compelling offering memorandum that attracts the right investors to your deal.