In this article we’ll take an in-depth look at what an OM is in commercial real estate, how they are used, and discuss how to create a commercial real estate OM.
What is an OM in Commercial Real Estate?
An offering memorandum – or OM – is a key legal document used in the private placement of commercial real estate. The OM provides buyers with information about the property and the offering, protects the Sponsor from potential liability, and serves as a tool for winnowing down the pool of bidders.
The offering memorandum describes the objectives of the investment, details some of the potential risks associated with the placement, and the terms and conditions of the commercial real estate private placement. Information in the OM document should include:
- Building description including property and location overview, demographics, operation and management
- Summary of the property’s past, present, and potential future return based on different assumptions
- Pro-forma financial statements including P&L, balance sheet, and investor distribution schedule
- Management and investment company biographies
- Participation requirements and confidentiality agreement
What are Examples of OMs in Commercial Real Estate
Oftentimes commercial real estate owners and developers want to raise capital to update and reposition an existing property, or purchase a new office building, without publicizing the offering to the general public as a broker would do when listing a property for sale.
An offering is generally exempt from Federal and state securities regulations if it is marketed privately to networks of past investors and other professional contacts. Under this method, the seller may allow an unlimited number of high net worth accredited investors plus up to 35 non-accredited investors. OMs that are advertised to the general public are limited to only accredited investors. Feldman Equities uses this latter method of raising capital.
What is a Memorandum of Agreement and is it Binding?
A memorandum of agreement, also called a deal sheet or letter of intent is a document that summarizes the proposed transaction between the buyer and seller including purchase price, basic terms and conditions, and contingencies.
Because a memorandum of agreement is a summary of the proposed offer it is not binding on the parties. However, the agreement does become binding once a purchase contract is drawn up based on the deal points outlined in the memorandum of agreement and fully executed by the buyer and seller.
What are the Consequences of Breaking a Memorandum of Agreement?
Breaking a memorandum of agreement can be a fairly common occurrence by both the buyer and the seller.
A buyer may have second thoughts about the investment, or may have located a better property to buy. By the same token, a seller may have received a better offer or the offering memorandum may have become oversubscribed, with more people willing to invest capital in the deal than the seller requires.
There are no legal consequences for either party breaking a memorandum of agreement. However, the buyer may have sunk soft costs such as legal fees for reviewing the document that can not be refunded.
Entering into a deal and then backing out may be viewed as “bad faith” and could make it more difficult for the parties to participate in future transactions.
How to Create a Commercial Real Estate OM
Table of Contents
Includes information on the property, location, demographics, rent or sales comparables, and a financial analysis with a summary, pro-forma statement, income and expenses, and hypothetical IRR under different scenarios.
When creating a table of contents, keep in mind that serious investors may look at several offering memoranda each and every day. The table of contents should make it easy for a potential investor to find what they are looking for – such as the seller biography or deal financials – without having to search through the entire OM. Doing this also shows investors the seller is professional and someone that is worth doing business with.
Branding
Branding in an offering memorandum helps the seller establish credibility with qualified investors who are seeking exceptional investment opportunities. Incorporating your company logo, brand colors, typefaces and writing style in your OM reinforce your company brand and help differentiate your company from the competition.
The commercial real estate business is as much about developing and maintaining productive and profitable relationships as it is about doing deals. While much of the offering memorandum focuses on the details of the investment, branding is focused on aesthetics. When used together, these two categories will complement each other, and build credibility with potential investors who may not be familiar with the seller/offeror or the local office market.
Simplicity
Serious investors are drawn to nice-looking offering memoranda that are pleasant to look at and easy to read. Uncluttered OMs help to make a positive first impression that makes the investor want to learn more about the offering.
Use just enough copy to convey the most important deal points, with a font size that is large enough to be read by everyone and white space to highlight the copy, photos, and graphics. The science of employing simplicity in an OM is also a psychological tool that uses readability and openness to show potential investors the offering is completely transparent and that the seller has nothing to hide.
Photography
While smartphones can be used for almost anything nowadays, using a phone cam to take photos for an offering memorandum definitely isn’t one of them. We’ve all heard the saying that a picture is worth a thousand words. Hiring a professional photographer to take top quality photos and property aerials will help to maximize the appeal of the office building offered for sale.
Be sure to include images of neighboring buildings, nearby amenities, parking and access roads, and retail locations. Although professional photos will cost more, digital images can easily be edited and re-used in other marketing material such as email and direct mail marketing.
Map
Location is everything in commercial real estate, and a clearly laid out map helps clarify the offering’s strengths and weaknesses.
Maps in an offering memorandum can be customized to include the property location and illustrate area highlights such as access to highways, shopping and entertainment areas, and proximity to business districts and residential areas. Amenities maps can also help to increase engagement for an OM by providing a balanced blend of visual design and hard data that position the property in the best possible way.
Clarity
Although potential investors appreciate an offering memorandum that is easy on the eye, serious buyers are most interested in the financials and the potential returns from the property.
OMs should be detailed enough so that an investor has all the information needed to make an investment decision, without financial documents and statements looking like they came from the Securities and Exchange Commission. Financial information should be complete, and easy to read and understand, and the statements should match the look and feel of the entire offering memorandum.
The easier statements can be read and interpreted by a potential investor, the better they will feel about investing their capital in the investment offering.
Tips for Improving Your Commercial Real Estate OM
Readable
Offering memoranda that are easy to read hold the reader’s attention longer and can increase the likelihood of the property selling faster and at a fair price. That’s why sellers and their OM designers spend so much time focusing on avoiding text-heavy paragraphs and incorporating design components such as:
- Simple fonts with good spacing
- Structured hierarchy of heading, subheadings, and paragraphs
- Key points emphasized with bolded text or bullets
Techniques like these help make an OM more readable and allow for quick scanning of property highlights with copy that is short, snappy, and right to the point.
Quality Pictures
A recent study by Microsoft showed that humans have a shorter attention span than goldfish. That means an OM needs to attract and keep a reader’s attention with high-quality images that generate positive emotion and create an extra “wow factor” for a better first impression.
Offering memoranda with too much text and too few quality pictures have little visual appeal, increasing the odds a potential investor will overlook important information about the property offering.
Some commercial properties offer exceptional rates of returns but aren’t the most photogenic. Professional photographers know how to take quality high-resolution pictures that can make a building more attractive, and combine interior and exterior photos with drone aerials, images of the surrounding area, and stock graphics.
Writing
The writing style used for an offering memorandum should be relatively conservative, informative, and straight-forward. Before writing an OM, it’s important to think about the key points of your offering, then deliver them succinctly and quickly.
Sentences and paragraphs should be short and to the point. Use clear headings and subheadings that support the body copy and help the reader locate information quickly.
Consider hiring a professional writer or copy editor to catch grammar, spelling, and punctuation errors that make the offering memorandum look amateurish. Potential investors will think that if there is a writing error, there may also be a mistake on the financial data included in the memorandum, causing them to pass on your offering.
Maps
Avoid copying and pasting a map from Google, because sometimes the exact locations are incorrect, and because it’s your brand you want to promote. Instead, include a map from a professional mapping source such as USGS TopoView to incorporate into your offering memorandum.
Use labels or arrows to highlight highways and parking, amenities such as retail and restaurants, nearby apartment buildings and residential neighborhoods, and other office buildings near yours and the major tenants occupying each property. Doing this makes it easier for an investor to understand the advantages of your offering and the type of tenants the property will attract.
Layouts
Major print and digital magazines always use a high-quality cover image to grab the reader’s attention, establish the brand, and create interest right from the start. An offering memorandum is no different, and a well-designed cover will encourage potential investors to open the memorandum and learn more.
Once the reader is inside, the layout should work to keep them there.
The best OM layouts are a well-balanced blend of space, text, and images presented in an attractive manner that is easy to read and comprehend. Margins and spacing should be large enough so that the memorandum appears uncrowded, white space should draw the reader’s eye to important elements, with long blocks of text broken with photos, maps, charts, or other images.
Financial Details
Don’t copy and paste your P&L or financial pro-forms from a spreadsheet or your property management software. Instead, use table and chart templates that match the overall feel and design of your offering memorandum and plug the numbers into these templates.
Doing this makes the financial details in an OM easier to read and comprehend, and also looks much more professional to prospective investors. Be sure to compare the data transferred from the working spreadsheets to the table and chart templates, and ensure that the numbers tie out. Presenting the financial details in an attractive manner takes a little more time, but just might be the deciding factor between winning or losing a sale.
PDF Size
There are two different PDF sizes for an offering memorandum. OM files that are designed for print are larger than the PDF memorandum versions sent via email or accessed online. Versions of the offering memorandum that are downloaded should be ‘lighter’ so that files download faster.
Top-rated PDF design software such as Microsoft Visio, Foxit, Adobe Acrobat, and Corel PDF Fusion have settings that allow the PDF file size of an offering memorandum to configure files for printing and optimized for sharing online.
Call to Action
Last but certainly not least, an offering memorandum should always ask for the order just like a good commercial real estate broker would. The way that most OMs call for action is with a confidentiality agreement, sometimes referred to as a non-disclosure agreement or NDA.
A confidentiality agreement is a legally binding document that identifies the name, address, and contact information of the receiving party, such as the prospective investor or representative. The NDA includes acknowledgements that confidential information sent to the receiving party such as the property being for sale or tenant rent roll may not be disclosed to any person, that the recipient is acting as a principal, and the state law governing the agreement.
Bottom Line
Once all of the information is compiled into a well-designed offering memorandum with concise text, quality images and photos, and easy-to-read and understand financial information, the next step is to begin looking for buyers or investors for the offering. While it may take a lot of time and effort to put this information together, creating an OM that is detailed and well thought out will attract the attention of serious investors and help the seller to winnow down the pool of qualified bidders for an office building investment.
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