How to Read a Broker Offering Memorandum for REPE Interviews

Every REPE modeling test starts with a broker's offering memorandum — and the candidates who perform best aren't the fastest at Excel. They're the ones who read the OM carefully before typing a single number. Brokers structure OMs to present assets in the best possible light: inflated pro formas, understated expenses, optimistic cap rates, and buried risk factors. This guide covers what to extract, what to distrust, and the five numbers that drive every underwriting.

What an OM contains

A standard multifamily OM (most common in REPE interviews) includes:

| Section | What It Tells You | Trust Level | |---------|------------------|-------------| | Executive Summary | Investment thesis, key metrics, asking price | Marketing — verify everything | | Property Overview | Location, unit mix, amenities, vintage | Generally accurate | | Rent Roll | Unit-level rents, occupancy, lease terms | Verify against T-12 | | T-12 Operating Statement | Trailing 12-month actual income and expenses | Most reliable financial data | | Pro Forma Projections | Broker's forward assumptions | Aggressive — rebuild yourself | | Market Overview | Comps, demographics, supply pipeline | Directionally useful | | Financing Summary | Assumed LTV, rate, DSCR | Often optimistic | | Photos / Floor Plans | Physical condition | Visual due diligence |

Rule: underwrite from the T-12 and rent roll, not the pro forma. The pro forma is the broker's pitch; your model is your analysis.

Step 1: Extract the five numbers that matter

Before opening Excel, write down these five inputs:

1. Unit count and mix

Total units, breakdown by type (studio, 1BR, 2BR, 3BR)
Average SF per unit type
Current occupancy (physical and economic)

Check: does the unit count in the executive summary match the rent roll? Brokers sometimes round or exclude non-revenue units inconsistently.

2. In-place vs. market rents

Average in-place rent (from rent roll)
Broker's stated market rent (from pro forma or rent comp section)
Loss-to-lease = (Market Rent − In-Place Rent) ÷ Market Rent

A 15%+ loss-to-lease signals a value-add opportunity — or a problem (rent control, bad location, deferred maintenance). Know which before you model.

3. T-12 NOI and expense ratio

T-12 Revenue (actual collected, not GPR)
T-12 Operating Expenses (actual)
T-12 NOI = Revenue − Expenses
Expense Ratio = Expenses ÷ Revenue

Compare expense ratio to market norms (35%–45% for stabilized multifamily). An expense ratio under 30% is a red flag — something is missing or capitalized incorrectly.

4. Asking price and implied cap rate

Asking Price (or broker's "guidance")
Implied Cap Rate = T-12 NOI ÷ Asking Price
Compare to market cap rates for the submarket and asset class

If the broker shows a 5.0% cap on pro forma NOI but 6.5% on T-12 NOI, they're capitalizing forward income — flag it and underwrite on in-place.

5. Occupancy and lease-up status

Current physical occupancy (%)
Current economic occupancy (%)
Any major vacancy concentration (one building, one floor)
Lease-up trajectory if below stabilization

Step 2: Red flags in the rent roll

Scan the rent roll for these before building revenue:

Concession-heavy tenants: multiple units with "1 month free" or below-market rents that expire soon — creates a revenue cliff when concessions end.

Below-market long-term tenants: rent-controlled or legacy tenants paying 30%+ below market — you can't mark to market until turnover (model explicitly).

Affiliated / non-arm's-length leases: owner-occupied units, employee units, or related-party leases at below-market rents — not sustainable income.

Unit mix mismatch: OM says 200 units but rent roll lists 195 occupied + 8 vacant = 203 lines — find the discrepancy.

Recent rent bumps without turnover: if average rent jumped 10% in the last quarter without corresponding turnover, check whether it's a one-time adjustment or sustainable.

Step 3: Red flags in the T-12

Property taxes below market: T-12 taxes based on prior owner's assessed value. If you're buying at a higher price, taxes will reset. Model taxes on purchase price × local mill rate, not T-12.

Understated insurance: insurance costs have risen sharply post-2020. T-12 may reflect an old policy. Get a quote or benchmark at $400–$600/unit/year for multifamily.

Missing expense categories: no line for management fee, replacement reserves, or payroll — broker moved them off the T-12 to inflate NOI. Add them back.

Capitalized operating expenses: repairs billed as capital improvements to keep NOI high. Common with value-add sellers who want to show "stabilized" NOI on a property that needs work.

One-time income items: insurance proceeds, legal settlements, or other income in T-12 revenue — remove for recurring NOI.

Step 4: Red flags in the pro forma

Brokers' pro formas almost always assume:

| Broker Assumption | Your Adjustment | |------------------|----------------| | Immediate stabilization (95%+ occupancy) | Model actual lease-up timeline | | Market rents from day one | Model loss-to-lease burnoff over 12–24 months | | Flat or declining expenses | Expenses grow with revenue; taxes reset on purchase | | No capital reserves | Add $250–$350/unit/year | | Flat exit cap rate | Assume +25–50 bps wider as conservatism | | Aggressive rent growth (5%+ annually) | Benchmark to market rent growth (2%–3%) | | No TI/LC during lease-up | Add realistic turnover costs |

Your model should produce lower returns than the broker's pro forma — if it doesn't, you're probably using their assumptions uncritically.

Step 5: Financing summary sanity check

Brokers often include a "financing summary" with assumed terms:

Broker's financing: 70% LTV, 5.0% rate, 1.30x DSCR, 30-year amort
Your check: Can in-place NOI actually support 70% LTV at 1.30x DSCR?

Size debt yourself using in-place CFBD (not pro forma NOI). If your max LTV is 62% and the broker assumed 70%, the broker's returns are overstated by the extra leverage.

Building your model from the OM

Once you've extracted and adjusted the five key numbers:

1. Revenue: Build from rent roll (in-place rents × occupied units), not broker GPR
2. Expenses: Start from T-12, adjust taxes to purchase price, add missing categories
3. NOI: Your adjusted revenue minus your adjusted expenses
4. Debt: Size from your DSCR/LTV analysis on in-place CFBD
5. Returns: Your cap rate assumptions, your exit cap (wider than entry), your hold period

Present your numbers alongside the broker's pro forma and explain every difference. This is exactly what REPE interviewers want to see: not just a model, but judgment about which inputs to trust.

Common interview questions

"How do you start underwriting from an OM?" Read the rent roll and T-12 before the pro forma. Extract unit mix, in-place vs. market rents, T-12 NOI, expense ratio, and occupancy. Flag red flags before building the model.

"What's the most common OM trick?" Capitalizing pro forma (stabilized) NOI instead of in-place T-12 NOI — makes the cap rate look 100–150 bps tighter than reality. Always show both caps.

"How do you handle property tax reassessment?" Don't carry forward T-12 taxes. Model on purchase price × local mill rate. This alone can reduce NOI by 10%–20% on a reassessed acquisition.

"What if the OM doesn't include a rent roll?" Request it. Without unit-level data, you can't build a credible revenue model. If forced to proceed, use T-12 revenue with explicit occupancy and rent assumptions — and flag the limitation.

The takeaway

The OM is a sales document, not an underwriting package. The T-12 and rent roll are your starting points; the pro forma is the broker's best case, not yours. Candidates who read carefully before modeling — adjusting taxes, adding reserves, modeling lease-up honestly — consistently outperform those who copy the broker's numbers into Excel and call it done.