Fifty information memoranda. Not one was ready to buy.

The third book

We have written before about the two records of the Australian commercial market that never reconcile: the advertised book, every campaign in front of a buyer, and the institutional book, what the research houses measure each quarter.

There is a third, and it is the only one that decides whether a deal actually happens: the deal book. What the documents say when somebody reads all of them.

This is ours. Fifty information memoranda, with every lease, contract, disclosure statement and annexure supplied alongside them, read against a fixed doctrine that records each finding with a severity and the page it came from. It is not a market sample; it is our desk. But nobody publishes theirs, and the shape of it is more useful than we expected.

Fifty interrogations, two verdicts never reached

The engine can reach five verdicts. Across fifty deals it reached three.

Forty-one INVESTIGATE. Eight WALK. One NEGOTIATE. Not a single PURSUE, and not a single PROCEED.

Before that gets over-read, the important distinction: an INVESTIGATE is not a judgement that an asset is bad. It is a statement that the asset cannot yet be priced, because something specific and named is missing. Several of these deals resolved the moment the missing document arrived.

The shape of 866 findings

866 findings across 52 deals, a median of 15 per deal, from a low of 6 to a high of 33. 45 of the 52 carried at least one critical finding.

Findings are evidenced rather than asserted: 563 of the 866 cite the page they came from and 509 cite a specific clause. That matters for what follows: these are not impressions of a document; they are locations in one.

Three in four criticals are an absence

Now the finding that reframed the whole exercise for us.

Of 91 critical findings, 69, 75.8%, are an absence. A lease not produced. A building not inspected. A contract or disclosure statement not supplied. A due-diligence right not granted.

Almost nothing at critical severity is a discovery about the property. The buildings are mostly fine. What is missing is the evidence that would let you say so.

That is a very different market problem from the one people usually describe, and it has a very different fix. You cannot inspect your way out of a missing lease.

The lease nobody sent

The single largest source of critical findings is the executed lease: 31 criticals, touching 28 of 52 deals.

For an investment asset, the lease *is* the asset. The building is the box the income arrives in. And in more than half the deals we read, the operative lease file was incomplete at the point a buyer was being asked to form a view on price: no executed copy, or the original without its variations, extensions, renewals or side deeds.

An IM will summarise a lease accurately far more often than not. The problem is that a summary cannot be underwritten, and the differences that matter, who pays for the air-conditioning, what the make-good actually requires, whether the option has been validly exercised, live in the clauses a summary leaves out.

The building nobody visited

The second largest is inspection: 18 criticals across 16 deals, and the theme touched 32 of 52 deals at some severity.

This one is on buyers as much as vendors. A campaign runs, an IM circulates, offers are invited, and nobody has yet had an independent set of eyes on the roof, the plant, the services or the essential-safety measures. For a single-tenant asset where the landlord carries structure and major plant, that is the difference between a yield and a guess.

When the IM income is not the lease income

This theme is smaller, 29 findings, 16 of them high, but it reached 21 of 52 deals, and it is the one we would most want a buyer to know about.

In two of every five deals, the income presented in the marketing did not match the income the lease actually produces. Not through dishonesty, in most cases. Through the ordinary gap between a marketing document and a legal one.

The recurring shapes, written generically:

• The advertised rent is GST-inclusive while the sale is contracted GST-exclusive, so the income is overstated before anything else is checked.
• A rent-free period still running means passing income overstates effective income for the first year of ownership.
• The IM prices income off a lease that has not yet commenced, or a rent not yet being paid.
• The IM narrative names a different tenancy or unit from the one in the operative lease.
• An uplift is justified by a verbal, unexecuted assignment.

Every one of those is arithmetic, not judgement. Each is also invisible unless somebody puts the IM and the lease side by side and reads both.

The failure in almost every deal

Outgoings are the near-universal problem: in 48 of 52 deals we could not establish, from the documents supplied, who pays for what. Land tax treatment, the recoverable proportion, management fees, sinking fund and special levies.

Almost none of it is critical on its own. All of it moves net income, which is the number the price is built on. A deal can be perfectly sound and still be mispriced by several per cent because the recovery position was assumed rather than read.

Two more with wide reach and low severity: environmental or hazard exposure, touching 43 of 52 deals, and title, zoning or planning questions, touching 38. These are mostly items to resolve rather than reasons to stop, but they are items, and they cost time.

Auction timing, and the right you did not get

Two themes are about process rather than property, and they compound everything above.

Auction timing produced 6 criticals across 20 deals. An auction campaign compresses due diligence into the window before the hammer, and it removes the cooling-off that a private treaty purchase would carry. Combined with an incomplete lease file, that is a structural problem, not a scheduling one.

No workable due-diligence right produced 9 criticals across 10 deals: contracts with no operative purchaser due-diligence condition, no any-reason right, and in a handful of cases terms that would bar a purchaser from claiming even if the lease turned out to be invalid or absent.

What this does not mean

We want to be careful, because this could easily be read as an attack on selling agents, and it is not one.

• An IM is a marketing document and is entitled to be. Its job is to get a building in front of buyers, not to be a data room. Most of what we flag is not in the IM because it was never the IM’s job to carry it.
• Most of these deals are fine. An INVESTIGATE verdict means "produce four named things and we can price this", and that is usually exactly what happened.
• Fifty deals is our book, not the market. These are deals that already cleared our own filters, so the sample is selected before anyone reads a document.
• Critical is our doctrine’s word. It is applied consistently across all 52 deals, but it is not an industry standard, and another desk would draw the line elsewhere.

How to use it

If you are buying, the practical value of this is a request list you can send on day one, ordered by how often each item is the thing that actually holds a deal up:

• The executed lease in full, with every variation, extension, renewal and side deed. Not the summary.
• The contract of sale and vendor disclosure, early enough to read them before you are committed to a campaign date.
• An independent building and services inspection, including roof and plant, before the offer rather than after.
• A workable due-diligence right, in writing, with enough days in it to use.
• The outgoings position, reconciled: recoverable proportion, land tax basis, management fees, levies.
• The income, reconciled to the lease, GST basis, rent-free periods still running, commencement date, and whether the rent quoted is actually being paid today.

If you are selling, the same list inverted is the fastest way to a clean process. Every item on it is a reason a buyer slows down, and every one of them is cheaper to resolve before a campaign than during one.

Method and limitations

An IM interrogation reads the information memorandum and every document supplied with it against a fixed doctrine, and records each finding with its severity, the page and, where there is one, the clause it came from.

563 of 866 flags cite a source page and 509 cite a source clause.

Limitations.

• Fifty interrogations is our book, not a market sample. It is what came across our desk and cleared our own filters first, so it is already selected: these are deals that looked worth reading, not a random draw from the market.
• A verdict is reached on the documents supplied AT THAT TIME. An INVESTIGATE is not a judgement that the asset is bad; it is a statement that it cannot yet be priced. Several of these deals resolved on production of the missing document.
• Themes are assigned by a deterministic keyword classifier over each flag’s title and description. It is published below so it can be argued with, and the residual "everything else" bucket is reported at its true size rather than tuned away.
• Severity is the engine’s, applied consistently across all 52 deals, but it is our doctrine’s definition of critical and not an industry standard.
• Nothing identifying is published. No address, suburb, tenant, vendor, agent, price or date appears anywhere in this report, and the recurring findings are written generically from the pattern rather than quoted from any single deal.

General information only, prepared for a professional audience. Not financial, investment, legal or valuation advice, and not a comment on any particular transaction, vendor or agent. We are not registered valuers.