What Is a Commercial Real Estate Prospectus?

A real estate investor prepares a prospectus

As an investor, it is important to have enough financial information about a real estate investment before putting money into it. Companies that wish to offer bonds or stocks for sale to the public are mandated to submit certain documents to the Securities and Exchange Commission (SEC). One of these documents is the prospectus. This document gives investors a bird’s eye view of the investment they’re thinking of making to be able to make an informed decision.

What Is a Prospectus in Commercial Real Estate?

A commercial real estate prospectus is a formal document required and filed with the SEC when offering real estate investment for sale to the public. The prospectus provides details about the investment and educates investors on the benefits and risks.

What Is In a Prospectus?

Much like a memorandum of understanding (MOU) or an offering memorandum (OM), a real estate prospectus contains complete details about the real estate investment. Here’s a brief overview of what goes into a prospectus:

Project Overview

The project overview provides investors with a summary of the project. This also includes information about the company’s strategy and its Unique Selling Proposition (USP).

Management Information

A prospectus provides information pertaining to the company’s executive management. The information includes their background, level of experience, and evidence of their executive position within the organization. Investors want to be sure they have the right people managing their money.

Deal Structure

This explains how the real estate fund will raise money. A real estate fund will usually raise money either through equity or debt. With an equity offering, the company sells equity shares and makes investors become partial owners of the company, much like when investors buy stocks from a publicly traded company. With a debt offering, on the other hand, the company issues bonds to its investors.

Use of Proceeds

This explains how commercial real estate investment funding will be spent and provides an overview of how the project will help provide a profitable return to the investors. The company may use some of the investment funds to purchase more properties, embark on new development projects, or run operational expenses for the purpose of scaling up the company. These items must be clearly specified in this section of the prospectus.

Offering Details

A prospectus should clearly specify how much money they’re raising, the real estate securities being offered, and the price. Also, the offering should provide information on the expected return of investment (ROI) and distribution policy. Depending on the distribution policy, investors may be paid as revenue is received or when a certain project is sold.

Financial Info

A commercial real estate prospectus must provide information about the company’s past financial performance, and an overview of the company’s current financial situation. Additionally, information about the value of assets the company currently holds, its liabilities, and operational expenses should also be listed here as well.

Potential Risks

There is no investment without some risks involved. A real estate prospectus should disclose risks that investors will face when investing in a commercial real estate project. This enables investors to be able to make informed decisions about the risks they’re taking. Additionally, valuable information concerning government regulations, capital restrictions, and other potential issues that investors may come across.

What’s the Difference Between a Commercial Real Estate Prospectus vs Offering Memorandum?

A prospectus and an offering memorandum are very similar documents. Both documents provide an overview of the detailed business plan, management structure, strengths, weaknesses, capital structure, asset values, amount of shares available, financial projections, and share values.

However, there are subtle differences. An offering memorandum is used for private placements while a prospectus is for publicly traded issues. A prospectus is used for public markets while an offering memorandum is used for private markets. Hence, a prospectus presents to an investor that the company is serious and has gone the extra length to ensure regulatory compliance, good business practices, and has maintained good records.

How to Scan a Prospectus

The risks, and also the benefits of a real estate investment are usually explained earlier in a preliminary prospectus and usually explained better and to more detail later in the document. In investments, a prospectus also protects a company from legal claims that it didn’t disclose enough information about itself or the investment in question.

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