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Underwriting from the offering memorandum alone: what to watch
Early in a deal, the offering memorandum is often all you have. The seller’s full T-12 and rent roll come later, if at all. You can still build a useful model from the memo. You just need to know where it’s thin.
Checking it takes real work. Even a model built from the memo alone has thousands of formulas. Any one of them can point at the wrong cell or leave out a row, and still show a normal-looking number. The only way to be sure is to check every formula, one by one, against the memo. By hand, that can take longer than building the model did.
What the memo usually gives you
- The property: its size, units or suites, and its type.
- A summary of the rent roll, often with each tenant or unit type.
- An operating statement, sometimes only a year’s totals.
- The broker’s pro forma: what the property could earn.
What it often leaves out
- Month-by-month income and costs, so one-off months are hidden.
- Each lease’s full terms, such as rent steps, options and who pays which costs.
- What a new owner will pay for taxes and insurance.
- The cost of filling empty space: free rent, improvements and commissions.
How to keep the model honest
- Start from today’s rents, not the pro forma.
- Label every assumption. A figure the memo doesn’t give should say it’s assumed, and why that number.
- Check the memo against itself. Its tables should add up and agree with each other.
- Ask for what’s missing. List the questions for the seller, and replace each assumption when the answer comes.
When the T-12 and rent roll arrive
Put them in, and see what moves. Where they differ from the memo, the seller’s own records usually win, but the difference is worth a question.