An offering memorandum is written by the party being paid to sell. Read it as a list of claims to test and it becomes useful. Read it as a description of the building and you will pay for things that have not happened yet.
Five phrases show up on almost every marketing package for multifamily buildings for sale in Southern California: pro forma rents, a cap rate, “value-add opportunity”, “recently renovated”, and a unit mix table. Below, each one gets the same two questions: what does it usually mean, and what would you need to see to believe it? Rebuilding the rent roll and the expense lines is a separate exercise, covered in what experienced buyers check before making an offer. This piece is about the language of the package itself.
“Pro Forma Rents” and the Cap Rate Quoted on Them
A pro forma is a forecast. On a broker’s package it is usually the rent a renovated, vacant unit would fetch today, applied to every unit as though all of them were renovated and vacant at once. Nobody owns that building. You are being asked to pay for it anyway.
An illustration, with hypothetical numbers. A 12-unit building in a Class B Orange County neighborhood collects an average of $1,850 per unit; the package shows pro forma rents of $2,400. In-place gross income is $266,400 a year, pro forma gross is $345,600. With expenses at 35% of income, in-place net operating income (NOI) is roughly $173,000 and pro forma NOI is roughly $224,600.
The package quotes a 5.5% cap rate. Ask which NOI it sits on. If the answer is pro forma, the asking price is about $4.08 million, and on the income the building actually produces that price is a 4.2% cap. The 130 basis points between those two figures is the seller charging you for renovation work you will do, and rent increases you will have to earn, after closing.
Two things to verify. First, the last three leases actually signed at the property, not comparable listings the broker chose. If the best recent lease is $2,150, then $2,400 is a hope. Second, the path from current rent to pro forma rent for each tenant who stays. Under California’s AB 1482 the annual increase on a covered unit is capped at 5% plus local inflation, never above 10%, and several cities cap it lower. A tenant paying $1,600 does not get to $2,400 through increases on any timeline you would underwrite.
Price the building on in-place NOI. The pro forma is your business plan’s upside, and you pay yourself for it by doing the work, not the seller for describing it.
“Value-Add Opportunity” and “Recently Renovated”
These two phrases often appear in the same package, which should tell you something. “Value-add” generally means the rents are below market and the interiors are dated. Sometimes it means the seller started a renovation, ran out of money or patience, and is selling you the rest of the job.
What to verify is the scope and cost of the work per unit, priced by a contractor you hired rather than a figure in the package. A full interior turn on an older Southern California unit (cabinets, counters, flooring, fixtures, paint) is commonly bid in the $15,000 to $30,000 range depending on scope; treat that as an illustration and get two bids on the actual units. On the 12-unit example, eight unrenovated units at $22,000 is $176,000 before anything is spent on the exterior.
Then test the premium. If a renovated unit rents for $550 a month more, that is $6,600 a year against $22,000 spent, a payback of a little over three years before counting the vacancy during the turn. That is a real opportunity. If the premium is $250, payback stretches past seven years and the phrase is decoration.
“Recently renovated” needs a date, a scope, and an invoice. Ask which units, when, by whom, and whether permits were pulled; most Southern California cities let you search the permit record by address. A cosmetic turn from 2019 with the original 1968 galvanized supply lines behind the drywall is a different building from one where the plumbing was replaced. Photographs show surfaces. Permits and invoices show what is behind them.
Walk the property with your own contractor and put the three items no package mentions on the list: roof, sewer lateral, and electrical service. A camera inspection of the main sewer line costs a few hundred dollars; replacing a failed lateral on a 1970s building can run well into five figures. The capital side of this is covered in more depth in our note on capital-expenditure due diligence.
The Unit Mix Table and What It Does Not Say
The unit mix is presented as a tidy table: four one-bedrooms, eight two-bedrooms. It is usually accurate. What it does not tell you is how each unit type behaves over a hold.
Studios and one-bedrooms turn over more often. That costs you a make-ready each time, but it also means those units reach market rent sooner. Two- and three-bedrooms hold families, who stay longer and whose rents move more slowly. In a rent-capped market, the long tenancies in the larger units are exactly the “below-market” rents you are least able to reset.
Ask for the rent roll sorted by unit type with each tenancy’s start date. On the 12-unit building, if the one-bedroom tenants have been in place an average of two years and the two-bedroom tenants an average of nine, most of the pro forma premium is deferred indefinitely, because it sits in the units that are not going to turn.
Two further checks. Compare square footage to rent by unit type; a 750-square-foot two-bedroom is priced by tenants as a large one-bedroom no matter what the table calls it. And reconcile the unit count against the county assessor’s record and the certificate of occupancy. Converted garages and split units are common in older stock, and income from a unit the city does not recognize is income you cannot rely on and a lender will not count.
What to Send Back to the Broker
Once you have read the package this way, the response writes itself. Request the trailing twelve months of operating statements, the rent roll with tenancy start dates and the date of each tenant’s last increase, the three most recent signed leases, renovation invoices and permits by unit, and the terms of any loan the seller would like you to assume.
Then state your basis plainly: the offer is on in-place NOI, at a cap rate that reflects the work still to be done. If the reply is that the price is based on the pro forma, you have learned who the package was written for, and it was not a buyer who intends to own the building through a full cycle.
This is the same reading VisionWise Capital applies to its own acquisitions: “Old, Tired and Occupied” buildings of 5–50 units, underwritten on what they earn today and bought at sub-50% loan-to-value on every property. Accredited investors who want that discipline applied on their behalf, rather than running it themselves, can see how a sponsored offering is structured in how a private real estate offering works.
Reviewing a package on a Southern California multifamily building and want a second read on the numbers? Talk to VisionWise Capital →
This content is for informational purposes only and does not constitute investment, legal, or tax advice. Real estate transactions and private placements involve significant risk, including potential loss of principal. Always consult qualified legal, financial, and tax professionals before making investment decisions.
Related Reading
- Apartment Complex for Sale: What Experienced Buyers Check Before Making an Offer
- How to Value an Apartment Building in Southern California
- How to Test Multifamily Operating Assumptions
Explore VisionWise Capital
For independent investor education, see the SEC's investor.gov introduction to investing.