Suneet Singal on how to read an offering memorandum

Suneet Singal has a published background in real estate and corporate finance, which is why an offering memorandum is treated here as a marketing document with numbers in it, not as a record. Filings on this site record a chief executive officer departure from FC Global Realty Incorporated effective 2 January 2018 and an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017. A filing is not a brochure, and a brochure is not a filing. An offering memorandum is prepared to attract buyers or investors. It can be full of useful facts. It can also mix in-place income with a pro forma and a price until a reader who is in a hurry sees a deal that the pages do not actually offer. This entry shows a labeled hypothetical of that mix-up and a way to read the document without becoming its messenger.

What you are holding

An offering memorandum is a sales document. It is usually prepared by a broker for a seller, or by a sponsor for investors. Its job is to present the property or the project in a way that produces a bid, a tour, or a subscription. That purpose does not make every sentence false. It tells you the sentences were chosen. Photographs, a list of strengths, and a market story are part of the choice. The disclaimer, often near the front or the back, typically says the figures are not guaranteed and that the reader must verify them. Read the disclaimer first, so you know what the author has already refused to promise.

The memorandum is not the lease, the deed, the loan, the tax bill, or the appraisal, unless those documents are actually attached and you are reading the attachment rather than the summary. A summary of a lease can omit the termination option. A summary of income can omit the reserve. The due diligence file is where the attachments, or the real documents, get tested. The memorandum is the list of claims you will test. If you treat it as the test, you have stopped at the first step and called it the last.

Public-company filings are a different genre. A Form 8-K is a current report under the securities laws, on a form the SEC publishes. It is not an offering memorandum for a single building, and an offering memorandum is not a Form 8-K. If a deal involves a public company, read the company's filings for what they say about that company. Read the memorandum for what it claims about the property. Do not cite one as if it were the other because both contain numbers.

A labeled hypothetical with two incomes

Use a hypothetical asking price of $15,000,000. The memorandum says the in-place capitalization rate is 6 percent. If that sentence is ordinary arithmetic, in-place net operating income is 6 percent of $15,000,000, which is $900,000. Check that the income page actually shows $900,000 and that it shows how the $900,000 was built. If the income page shows a different number, the headline rate and the income page disagree, and you should not pick the one you like better. You should find the error.

The same hypothetical memorandum shows a pro forma NOI of $1,050,000. Divided by the $15,000,000 asking price, that income is 7 percent, not 6 percent. The memorandum did not claim a 7 percent in-place rate. It claimed a 6 percent in-place rate and, separately, a higher pro forma income. Both can be printed honestly if the labels are honest. The mix-up happens in the reader's head. If you divide the pro forma $1,050,000 by 0.06, you get $17,500,000. That price is not the asking price. You created it by applying an in-place cap rate to a pro forma income. The cap rate entry is the warning in general form. This is the same warning inside a brochure.

Write the two sentences on your first note, worded so they cannot be swapped. "In-place NOI $900,000, asking price $15,000,000, implied cap rate 6 percent." "Pro forma NOI $1,050,000, which is 7 percent of the same asking price, and which is not the in-place income." If the pro forma depends on leasing vacant space, raising rents, or cutting expenses, add the condition in the same note. A hypothetical $500,000 of capital spent to reach the higher income belongs in the cash flows before you compare $900,000 with $1,050,000. The higher income is not free just because it appears in the next column.

A practical order of reading

Start with the disclaimer and the asking price. Then find every number you might repeat: price, NOI, cap rate, occupancy, rent, loan amount, and any projected sale. For each number, find the page that builds it. If NOI is in the highlights and the expense detail is missing, the NOI is a claim waiting for a statement. If occupancy is a percentage, find the rent roll that produces it. If the rent roll is summarized, ask for the full roll with an as-of date. The rent roll entry shows what that full roll needs to contain. A memorandum that will not survive this scavenger hunt is not ready to be modeled. It may still be ready to tell you what to request.

Separate in-place figures from pro forma figures with a pen, not with a feeling. In-place should tie to trailing statements and signed leases. Pro forma should tie to an assumption page. The assumption page is easy to miss because it is less photogenic than the building. Read it early. It will tell you the vacancy factor, the growth rate, the exit cap rate, and whether expenses were held flat. Those choices are the deal the author is recommending. The photographs are not. If there is no assumption page, the pro forma is a set of results without causes. Do not supply the causes from your own optimism and then attribute them to the memorandum.

Financing pages need the same separation. "Available financing" or a sample quote is not a commitment to lend to you, at that rate, on this property. A loan you would assume has documents: the note, the remaining balance, the rate, the maturity, and any assumption fee or lender consent. If those are not in the memorandum, the debt page is an invitation to ask. The debt entry lists the terms worth asking for. Do not put a sample rate into a bid as if the lender had signed it.

What you should have before you rely on it

Before you rely on income, you want the leases or a reliable abstract with the signature pages, a current rent roll, a trailing twelve-month statement, and the general ledger or another tie to collections. Before you rely on expenses, you want tax bills, insurance, and the larger service contracts. Before you rely on a physical claim, you want a condition report or your own inspection. Before you rely on a market paragraph, you want the source, the date, and the geography. The memorandum's market pages often cite nothing. Treat unsourced market paragraphs as brochure text. They may point you toward a real source. They are not the source.

The Federal Reserve's May 2023 Financial Stability Report, the Census vacancy survey, the FHFA house price index, and the National Association of Realtors research pages are examples of public sources with their own definitions. A memorandum that quotes a figure from them should let you find the figure. If it does not, do not repeat the figure. This reference does not copy statistics out of those publications into a fake local fact, and you should not let a brochure do it either. A sourced national series is still not the rent roll of the building on the cover.

If you are an investor in a sponsor's offering rather than a buyer of a whole property, add the organizational documents to the request list. The memorandum's return exhibit is not the waterfall. The joint venture entry shows how a promote and a preferred return can produce a different result from a simple split. Ask for the agreement and a dollar-by-dollar trace. A projected internal rate of return in a highlight box is not that trace. It is an output. Outputs without inputs are slogans with decimal places.

Assumptions and the cost of a story

Many memoranda tell a value-add story. Rents are below market, occupancy can rise, or expenses can fall. The story is a set of assumptions plus a cost. Make a small table in your notes, in sentences if you do not want a spreadsheet yet. What is the in-place rent. What rent does the story use. How many months of downtime. What is the tenant-improvement and commission cost. What capital project is required. In the hypothetical, moving from $900,000 to $1,050,000 of NOI is a $150,000 increase. If that increase requires $500,000 of capital, you have not created $150,000 of value by typing the higher NOI. You have proposed to spend $500,000 to chase $150,000 a year, and you still have to discount the chance that the chase fails.

Exit assumptions hide in the same section. A sale at the end of year five, at a cap rate lower than the going-in rate, can create more of the sponsor's projected profit than the rent increase does. The holding period and exit entry shows how sensitive that sale is. If the memorandum uses one exit rate, compute one higher rate before you repeat the projected profit. You are not correcting the author. You are seeing whether the story survives a different assumption. A story that only works at one unspoken rate is a thin story.

None of this requires you to be hostile. A clear memorandum that labels in-place income, shows the assumptions, and attaches a rent roll is a good start. You can thank it by reading it carefully and by requesting the documents it names. Hostility is a poor substitute for a tie-out. So is enthusiasm. The useful posture is a list of numbers, each with a page and a source, and a second list of numbers that are still only assumptions.

Usual mix-ups

The first mix-up is averaging the highlights. The cover says a price, a cap rate, and an occupancy. The body contains a different income and a rent roll that does not match the occupancy. A reader in a hurry averages or remembers the cover. Do not. The cover is a claim about the body. If the body disagrees, the body is the better description of what the author could bring themselves to print in detail, and the disagreement itself is information. Quote the detailed page, and mention the cover only to note the conflict.

The second mix-up is the cash-flow label. Some "cash flow" lines are NOI. Some are after debt service. Some are after a reserve and some are before it. The hypothetical $900,000 might be any of those if the label is sloppy. One look at the line above the total tells you. If the line above is a loan payment, you are not looking at NOI, and a cap rate computed on that figure is not a cap rate. Relabel it in your notes. Then decide whether you still want to compute a rate on a true NOI you build yourself.

The third mix-up is reading a confidentiality footer as a reason not to check public records. The footer governs how you treat the seller's materials. It does not make the tax assessor, the flood map, or the zoning map confidential. You can usually verify a great deal about a parcel without circulating the memorandum. Do that. A brochure that contradicts the tax bill or the zoning map has told you something important about its own care. The location questions and the tax entry are there so those public checks have a shape.

What the memorandum cannot prove

An offering memorandum cannot prove that the seller will close at the asking price. The asking price is an invitation. The price you pay, if you pay one, will be in a contract. The memorandum cannot prove that the pro forma will happen. The pro forma is a case. It cannot prove that you have completed diligence by reading it. Reading it is how you learn what to verify. The verification is the leases, the statements, the bills, and the inspection.

The memorandum cannot prove that a projected return is a result. Investor.gov's introduction to investing is a general warning that projections are not guarantees. The warning fits a property brochure as well as it fits any other solicitation. If you repeat a projected rate, repeat the assumptions in the same breath, including the exit cap rate and the capital cost. If you cannot remember the assumptions, you are not ready to repeat the rate. The rate is the part the author most wants remembered. Your notes should remember the part that makes the rate move.

The memorandum cannot prove a personal portfolio. This hypothetical $15,000,000 offering is not a property of Suneet Singal, and the page does not say he is selling or buying it. The career record is not an offering memorandum. Use the reading order on a brochure you were actually sent. If the brochure will not show its income, its assumptions, and its disclaimer, you already have your first finding. You do not need the rest of the adjectives to make it.

What this entry does not claim

Suneet Singal’s published professional background is in real estate and corporate finance. Company filings linked from this site record a chief executive officer departure from FC Global Realty Incorporated effective 2 January 2018 and an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017. The Suneet Singal Scholarship, Grant and Giving websites describe him as the founder of those programs. This entry explains a general subject. It is not a private track record, a current job title, an investment result, or a quote.

This page is a reference, not investment advice. Testing the claims is the work in real estate due diligence, and the income schedule under the highlights is how to read a rent roll.