Buying & due diligence · Offering memorandums
What is an offering memorandum in commercial real estate?
The short answer
An offering memorandum (OM) is a marketing document that presents a commercial property to prospective buyers. It typically summarizes the asking price, tenant, lease terms, rental income, property characteristics, and investment highlights. An OM helps investors evaluate an opportunity, but its contents should be independently verified.
Read the full answer ↓What does a commercial real estate offering memorandum include?
A commercial real estate offering memorandum commonly includes:
- Property address, photographs, and building specifications
- Asking price and advertised capitalization rate
- Tenant information and lease expiration date
- Current rent and scheduled increases
- Property location and surrounding market information
- Investment highlights and potential risks
- Broker contact information and disclaimers
The specific contents vary by property and brokerage.
For investors comparing NNN real estate for sale, an OM can help identify opportunities that deserve further investigation.
Is an offering memorandum legally binding?
An offering memorandum is generally an informational or marketing document, not the purchase agreement itself.
An OM may contain financial projections, estimates, or information supplied by third parties. Those figures should not automatically be treated as contractual promises.
Example
A property advertised for $5 million with $300,000 in annual net operating income has a 6% cap rate. If verified income is only $275,000, the cap rate falls to 5.5% at the same price. This hypothetical calculation shows why advertised income matters.
The SEC’s EDGAR database contains publicly filed transaction agreements that investors can examine to understand how representations, warranties, and investigation responsibilities are documented.
An offering memorandum describes the proposed investment. The executed contracts establish the parties’ legal rights and obligations.
Key offering memorandum terms
- Offering memorandum (OM)
- A document presenting property information to prospective investors.
- Cap rate
- Annual net operating income divided by property value or purchase price.
- Rent roll
- A schedule of tenants, rental amounts, and related lease information.
- Disclaimer
- Language describing limitations on information or responsibility.
- Due diligence
- The buyer’s investigation of financial, legal, and physical property conditions.
- Net operating income (NOI)
- Property income after operating expenses, before financing costs and certain other items.
What should buyers verify before making an offer?
Compare the OM against the actual lease, amendments, rent records, property reports, title documents, and available financial information.
I recommend checking three figures first: verified annual rent, landlord expenses, and the remaining lease term. Together, they help establish whether the advertised income and pricing assumptions are reasonable.
Check whether the advertised tenant is the legal leaseholder, whether rent increases are guaranteed by the lease, and whether the landlord retains major repair obligations.
Our guide to evaluating an NNN leased property explains why these details affect investment decisions.
Key takeaways
- An offering memorandum summarizes a commercial real estate opportunity.
- Advertised financial figures require independent verification.
- An OM does not replace the executed lease or purchase agreement.
- Buyers should investigate material assumptions before committing capital.
Explore our NNN investment information for additional guidance.
Use the offering memorandum to identify the opportunity. Use due diligence to determine whether the opportunity holds up.
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