How to Read an Offering Memorandum. The 7 Numbers That Matter
An offering memorandum is a sales document. A good one is also accurate, but its job is to present the property in its best light. Your job as a buyer is to read it the way a broker wrote it: number by number, with a question attached to each.
Here are the seven numbers we tell clients to pull out of any OM before they fall in love with the photographs.
1. Price per square foot, twice
Divide the asking price by the building square footage, then again by the land square footage. The first tells you what you are paying for improvements, the second what you are paying for dirt. In LA infill submarkets, the land number often explains a price the building number cannot. If neither lines up with the comp set in the OM, ask why.
2. In place NOI versus pro forma NOI
Net operating income comes in two flavors, and the difference between them is the seller's homework assignment for you. In place NOI is what the property earns today. Pro forma NOI is what the broker believes it could earn after lease up, renovation, or resetting rents to market. Both are legitimate. Confusing them is how buyers overpay. Every pro forma line deserves a source: which rent comps, what vacancy assumption, whose expense numbers.
3. The cap rate, and which NOI it is built on
A cap rate is just NOI divided by price. Quoted alone it is marketing. Quoted with its inputs it is analysis. A 6.92 percent pro forma cap on a vacant retail building means something specific: this is the yield if you lease it at the rents shown. Your question is whether those rents are supported by signed comparable deals or by asking rates.
4. The rent roll, lease by lease
For occupied property, the rent roll is the business. Check remaining term, escalations, options, and who pays which expenses. One tenant rolling in eighteen months can matter more than the cap rate on the cover. For multifamily, compare in place rents to the market rents claimed, and ask which units are subject to rent stabilization.
5. Expenses, especially the ones that reset at sale
Property taxes are the classic trap in California. The OM may show the seller's current tax bill, but under Proposition 13 your basis resets at your purchase price. Recalculate taxes at roughly the price you intend to pay, not the price the seller paid years ago. Insurance is the other line moving fast in LA. Get a live quote, not last year's number.
6. Traffic, walkability, and the demand story
For retail, numbers like vehicles per day and Walk Score are proxies for the only question that matters: will customers show up? Treat them as a starting point and stand on the sidewalk yourself, at the hours your business or your tenant's business cares about.
7. What is not in the OM
Every OM has a disclaimer telling you to verify everything. Take it literally. Zoning, permits, seismic status, and title exceptions are usually summarized, not proven. The gap between summary and proof is what due diligence is for.
The takeaway
An OM read this way takes twenty minutes and produces a list of questions. Send the list to the broker. Good listings survive good questions, and the answers tell you as much about the deal as the document did.
We write our OMs to survive exactly this reading, and we are happy to walk you through anyone else's. If there is a deal on your desk you want a second set of eyes on, let's talk.
Chandler Rockwell, The Rockwell Group
(310) 405-7632 | Chandler@fredleedsproperties.com | Lic. 02080782
Disclaimer: All information is from sources deemed reliable and subject to change. Nothing here is legal or tax advice. Verify all figures independently during due diligence.
