What are the most important aspects of an offering memorandum/offering memorandum?
To all the analysts/associates/VP's at debt and/or equity real estate investors, what are the most salient aspects of an offering/financing memorandum and which aspects are typically ignored?
To provide some context, I work as an analyst at a top capital markets shop in a major US market and a primary component of the job is to put together fancy OM's to present to prospective investors. However, a lot of the information--especially market and location overview section--in the books we create merely uses selective data/statistics to paint the opportunity in the best possible light. Granted, our job is to sell the opportunity so I get that part. But given that there is a clear conflict of interest when it comes to how we are presenting the data and investment opportunity, it seems that if I were an analyst/associate on the lending or principal side, I would take broker OM's information--especially the market overview sections--with a huge grain of salt and default to third-party data providers for primary market research.
Nevertheless, I also get the sense that the OM is more about making sure the client is happy rather than producing a book that investors are going to heavily rely on--again more from a market perspective--to determine how to underwrite a particular deal.
Therefore, I would just like to get a better sense of what parts of an OM actually matter to a lender or equity investor and which parts don't matter--or at least are not as important as the most important aspects of the OM. @MonkeyWrench" I'm particularly interested in your perspective given your experience on both the sell-side and principal side.
Thanks
I pretty much look exclusively at the rent roll, physical characteristics of the building, executive summary, and the financials. A lot of the other stuff is unnecessary unless it is in a market that I am unfamiliar with. Even then I typically do my own research rather than just look at what the broker sent. The Argus model is helpful as well for reference, but I always build a new model as I don’t trust brokers to not try to sneak something into their model that moves the needle. It is expected that the information coming from the brokers is biased.
For a lender, tbh I really only need the rent roll, historical operating statements/proforma in excel (please no pdf). Thats it. I dont even need a proper OM most of the times in order to send you a quote. All the other market info, sponsor info is really fluff that can be summarized in a few sentences in an email. But I totally get that preparing a 30 page OM is one way you can justify value and show the sponsor that you have spent hours working on the deal, so its fine and we all have to do what is expected of us.
For equity investors, I would imagine you would need to send more comprehensive info and just the rent roll and the historicals is not going to cut it.
On the principal side from start to finish...
- Investment Highlights / Summary: I'm reading this to get a feel for the asset, size, submarket, class, finish, etc.
- Physical: I want to know the age of the property and all major systems to help determine what kind of deferred maintenance we need to consider.
- Comps: I typically breeze through these, but sometimes use them as a starting point. We play in markets that we know pretty well and some of the broker's suggested comparables are so far off you just have to laugh. Regardless, this can help us understand appraisal for tax purposes and other useful details.
-Financials: I spend a lot of time here, especially in due diligence. Also, I've found it helpful to take the broker's YR1 NOI and cap it where we've seen comps trade. Multifamily NOIs are always way off, but this gives us a good idea where pricing may end up if we haven't been given guidance.
I pay almost zero attention to what the broker says about rent growth potential, suggested value-add, submarket characteristics, top employers in the area, or what speculative development has been announced on a 15-year horizon with accompanying renderings. Unlike the above, we actually take the broker's Argus run and make our underwriting tweaks until money goes hard. If we find any trickery in DD, we have reasonable grounds for a retrade.
Speaking from the multifamily side, there are a handful of specific items that bug me:
Floorplan/Unit mix detail - when an OM says "X% of the units have been renovated and are achieving $Y premiums", without any breakout or direction as to which units in the rent roll have been renovated. I have seen some OM's that don't even have a unit mix. This should be standard. I find emailing the analyst and copying the MD results in quick turnaround.
Tax millage rate breakdown - providing a comprehensive list of each taxing authority and current millage rates helps tremendously. I don't see this often.
Data Sources- I typically like to use info from the OM for our internal writeups. If an OM says: "X submarket has created over 5,000 jobs in the past year", I would like to see the source footnoted for that statistic. Many buyers adhere to SEC regulations that require them to back up their assumptions with sources, and "taking the broker's word for it" is unfortunately not a source.
History of Asset - I've seen some OM's that have a brief section on the asset's developer and subsequent ownership history, and any major physical improvement projects. I wish more would do this.
Edit: another thing that just came to mind...if you are going to outline the property over an aerial, make sure you take a look at the survey and are reflecting the boundaries of the property correctly. Can't tell you how many times property outlines are inaccurate. Damn, it's a broker's business right now. We need a market correction to flush out this laziness.