# Solution: What the Offering Memorandum Overstated

> Illustrative teaching case. Northgate Commons is not a real property, this is not a real transaction, and the term sheet is not a real financing quote. Every figure is fabricated for instruction.

The offering memorandum is a professional document. It is not fraudulent and it
is not sloppy. It is advocacy, and reading it well means measuring the advocacy
rather than complaining about it.

## The headline

| Figure | Net operating income | Cap rate at $17,400,000 |
|---|---|---|
| Seller reported, calendar 2026 | $1,118,412 | 6.43% |
| Trailing twelve adjusted for the roof | $1,304,912 | 7.50% |
| **Broker year one pro forma** | **$1,469,615** | **8.45%** |
| **Underwritten** | **$1,090,004** | **6.26%** |

The gap between the pro forma and the underwritten figure is
**$379,611**, or
34.8% of the
underwritten number. Capitalized at the exit cap that gap is worth roughly
$6,073,776 of value, or about
86% of the $7,089,840 equity check on
this deal.

## Itemized

| Item | Effect on net operating income | Why it does not hold |
|---|---|---|
| Rent growth of 4.5% applied to market rents | $91,087 | The market survey supplied in the package forecasts 2.8% for the next twelve months and the last twelve months ran 3.1%. Underwriting year one off the trailing twelve months applies no forward growth at all. |
| Vacancy factor of 4.0% | $60,777 | The submarket survey shows 6.0% and the property's own trailing twelve months ran higher once concessions and credit loss are counted. A 4.0% factor is below both. |
| No management fee anywhere in the expense load | $55,950 | The seller self-manages. A buyer pays a third-party manager, and the lender underwrites one whether or not the buyer intends to self-manage. |
| Property taxes held at the seller assessed value | $122,958 | The county reassesses to roughly 92% of the recorded sale price in the tax year after a transfer. The seller has held since 2009. |
| No replacement reserves | $36,000 | A 1986 asset needs an ongoing capital allowance. The term sheet escrows $300 per unit per year, so the reserve is a cash cost regardless of how the pro forma presents it. |

Itemized total: $366,772. That does not reconcile exactly to the
$379,611 headline gap, and it is worth understanding
why rather than forcing it. The vacancy item above is measured against a 7.0%
underwriting factor for illustration, while the underwritten year one uses the
property's actual trailing vacancy, concessions, and credit loss rather than a
single factor. Bridges between two differently constructed statements rarely add
to the penny, and a bridge that does add exactly is often one where the
differences were plugged.

## What the memorandum got right

Two things, and noticing them matters as much as catching the rest.

**It removed the roof from repairs and maintenance.** Footnote 3 of the pro forma
pulls the $186,500 out as a non-recurring capital
item. That is the correct treatment, and it is the same adjustment you make. A
reader who assumes everything in an offering memorandum is inflated would have
put it back in and landed $186,500 low.

**It carried the loss to lease at the rent roll figure.** The pro forma does not
pretend the property is already at market. It shows
$89,340 of loss to lease, which ties to the rent roll. Many pro
formas do not.

## The reading habit this teaches

An offering memorandum is a set of claims, each with a place in the package where
it can be checked:

| Claim in the memorandum | Where you check it |
|---|---|
| The rent growth applied | The submarket survey forecast and the trailing reading |
| The vacancy factor | The submarket survey and the property's own trailing statement |
| The expense load | The trailing statement, line by line, per unit |
| The tax line | The reassessment rule in the property notes and your price |
| The management line | Whether anyone is being paid to manage, and the market rate |
| The renovation premium | The renovated units already leased on the rent roll |

Every one of those checks is available inside this packet. That is usually the
case in a real data room too. The information asymmetry in a marketed deal is
smaller than it feels; the asymmetry is mostly in who reads carefully.

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*Illustrative teaching case. Northgate Commons, the market, the broker, the lender, the comparables, and every figure in this packet are fabricated for instruction. Nothing here is a real property, a real transaction, or a real financing quote.*