How to Read an Offering Memorandum

An offering memorandum — an OM, sometimes a setup or an offering package — is the marketing document a broker prepares to sell a commercial property. It typically runs 20 to 60 pages: photos and a location narrative, a rent roll summary, a statement of operating income and expenses, a pro forma projection, market and demographic data, and comparable sales. It is prepared by the seller's agent, for the purpose of selling the building. That is not a criticism; it is simply what the document is for, and reading it as anything else is where buyers get into trouble.

Parts of it are, and the parts differ in kind rather than in degree. Lease terms restate a contract and can be checked against the lease. Operating expenses restate the seller's own books and are usually reported in good faith, though the categories can be arranged to flatter. The price, the cap rate, the stated NOI, the pro forma, the market rent and the growth assumptions are not facts at all — they are the seller's position. The mistake is not trusting the document; it is treating all of it as the same kind of claim.

The rent roll, against the actual leases. Every number downstream — NOI, the cap rate, the value, the return — is derived from it, so an error there propagates through everything else while looking like arithmetic. Check the suite sizes, the lease expiration dates, the current rent and the escalation schedule, and which expenses each tenant actually reimburses. Then check what the stated NOI was computed from, because that is the number the advertised cap rate rests on.

In-place NOI is what the building earns today under the leases that exist. Pro forma NOI is what it would earn under assumptions that have not happened yet — vacant space leased, below-market rents rolled up, expenses trimmed. Both are legitimate figures. The problem is when a cap rate is computed from pro forma NOI and presented without saying so, because a 6.5% cap rate on projected income and a 6.5% cap rate on actual income are not the same offer, and the gap is usually worth hundreds of thousands of dollars.

Do not check it — rebuild it. Take the rent roll, apply the actual leases, subtract the real operating expenses, and divide the result by the asking price. That gives you the cap rate the building actually supports today. Compare it to the one printed on the cover. If they differ, the difference is either the pro forma or an expense that was left out, and either way it is the most useful number you will produce all week.

Capital expenditure and reserves are the usual omissions — a roof or an HVAC replacement that is due does not appear in NOI and does not have to be disclosed in the operating statement. Management fees are sometimes excluded when the seller self-manages. Tenant improvement and leasing commission costs for upcoming rollover are rarely modelled. And the details of near-term lease expirations tend to be summarised rather than shown, which matters most when the biggest tenant is the one rolling.

Read it, do not adopt it. A pro forma tells you what the seller believes is achievable, which is genuinely useful information about the business plan and about the seller's own view of the upside. It is not a projection you should underwrite to. The practical approach is to underwrite the in-place income, price the deal on that, and then treat the pro forma as a separate question: what would it take to get there, how long, how much capital, and is that upside already in the price?