How do you make an offering memorandum for a real estate deal?

An offering memorandum (OM) is typically published as a PDF and then  shared with prospective investors. It covers a substantial amount of legal and marketing material, including an executive summary, deal structure details, risks and disclosures sections, and an investor suitability form. A securities or real estate attorney most often assembles your OM for you while sourcing transaction-related content from you. 

Intro

Let’s jump right into it. The following is a list and brief explanation of the different elements that go into putting an OM together. 

Executive Summary

The Offering Memorandum begins with an executive summary, which lays out the high-level. In simple terms, the acquiring entity is seeking capital and there’s a brief description of your investment company (which may control or be the acquiring entity), its mission, the deal you’re pitching, a detailed description of the executives’ industry experience, and finally, deal financing requirements.  

Location

Right after the executive summary, we jump into the location of the asset. Add images of the property’s location on a map, an aerial view of the site, and a second map highlighting important  places (demand generators) near the property such as an airport, public transportation, restaurants and stores.

Photo Gallery

After describing the property’s physical location, insert multiple images of the actual property. For example, if it’s an apartment unit, add images of the interior, such as the kitchen and bathrooms. If the property is a retail center, show images of the different stores, the parking lot, and what visibility and access looks like from the street.  

Investment Summary

The investment summary section covers various subtopics, each of which has its own separate section and brief description. 

  • Property description

Describes/includes  where the property is located, when it was built, how large it is, any repairs it may need, and the current occupancy. 

  • Investment opportunity

Describes where the property is located, when it was built, the size, any repairs it may need, and current occupancy figures.

  • Purchase price

The exact price for which the property will be purchased.

  • Total capitalization

Price describing the total capital in debt and equity that will be raised for the all-in transaction.

  • Preferred return

The estimated preferred return, annually.

  • Projected returns

Estimations of IRR, net to investor members, and the multiple on invested capital.

  • Manager/Sponsor

The sponsor company that controls the investment entity.

  • Property/Asset manager

Description of the asset manager.

Description of the asset management fees.

  • Proposed structure

This image below depicts the structure of the deal between investors, sponsors, asset management, and property management:

Proposed Real Estate Structure
  • Distributions

This shows every year’s projected distributions and preferred returns. Include a description of the promote/waterfall structure.

  • Acquisition fee

Typically around 1%-2 of the purchase.

  • Management authority

Description of how the manager holds control over the management and affairs of the property (not granting any rights to alter the LLC agreement).

  • Proposed use of proceeds

What will you do with the investors’ capital? This should include acquiring the property, making repairs, maintaining the property, etc. 

Estimated Sources and Uses

This section shows the amount of equity and debt to be raised, which are then add up to form the total sources of funds. You can copy and paste a screenshot into your OM from an excel model like in the example below. Also included shall be the uses of funds, including purchase price, closing costs, acquisition fee, working capital, and fronted capital expenditure, for example. 

Loan Terms

The loan terms section is broken into the following subtopics:

  • Loan amount

What is the approximate loan amount and the percentage of the purchase price it makes up.

  • Borrower

Which entity will be borrowing and what kind of company it is.

  • Interest rate

What is the locked interest rate?

  • Term

How long is the term, and is it a fixed rate or variable rate?

  • Amortization

Does amortization begin right away, or is there a period of interest-only servicing?

  • Collateral

What collateral does the lender have on the deal?

GB Real Estate Fundraising Automation

Competitive Set

This table depicts the competitors in your market, where you stand against them, and each competing property’s financial information.

Industry Overview

Every industry is different, whether residential, retail or another niche. Briefly describe what the specific industry for your property type is like in today’s market. 

Market Overview

Similar to the industry overview, the market overview gives geographic specific insight on the real estate market where your building is located. Include facts about the city, such as population and financial status in addition to real estate market performance.

Risk Factors

Every real estate deal has multiple risk factors. This section should include every risk related to the business, tax, accounting, and legality of the property. There are often 10 to 20+ risks and each one should have its own paragraph description. 

Investor Suitability

Real estate deals frequently receive support from accredited investors. This last section in the OM describes what types of investors the deal is suited for, and may be based on rules and regulations with regards to investor accreditation or general solicitation. These are the guidelines that concern the investors’ financial status and their ability to bear the risk of losing an investment.

Putting it all together

Pull all of this info together into a neatly formatted document and you’ll be ready to start soliciting investments for your deal. It may take quite some effort to get all of this information, but having a complete and thoughtful offering memorandum that includes the sections suggested here will go a long way to instil confidence in your investors and serve as a guide throughout your process of issuing a new offering.

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