20 CRE Acquisition Mistakes to Avoid

One of the most important procedures involved in acquiring a CRE asset is the entire acquisition process. The acquisition process includes soliciting deals from brokers and sellers, visiting the properties, analyzing the markets, underwriting the properties, due diligence analysis, negotiating the agreement of purchase and sale, arranging the debt and equity capital, and closing the purchase. Many purchasers make costly blunders during the acquisition process. Listed below are 20 of these common mistakes.

1. Relying on the broker/seller regarding property and tenant data without independent verification.
2. Failure to read and abstract all tenant leases on commercial properties.
3. Failure to obtain tenant estoppel letters from the major tenants and for at least 75% of the rentable square footage of a commercial property.
4. Failure to verify tenant sales on retail properties, especially the anchor tenants.
5. Having the seller’s real estate counsel prepare drafts of the purchase and sale agreement and other closing documents. The purchaser’s counsel should prepare all acquisition documents.
6. Undetected or  hidden formula errors in the Excel or Argus underwriting worksheets.
7. Failure to complete a thorough physical inspection and engineering report on the property and each property in a large portfolio acquisition.
8. Agreeing to allow the seller to provide no representations and warranties regarding the property.
9. Senior management of the purchasing firm not visiting the property and market prior to closing.
10. Failure to perform credit due diligence and financial analysis on the major tenants, especially retail tenants.
11. Not anticipating the lender’s lockbox requirement for rent collections for the new property loan.
12. Failure to prepare a schedule and provide a funding mechanism for property capital improvements.
13. Failure to reconcile an apartment property’s yearly effective gross income to the seller’s yearly cash deposits on the bank account statement.
14. Failure to review the tax returns for the entity that owns the property.
15. Not preparing a scenario analysis of the property underwriting with at least a “most likely” and “pessimistic” outlook.
16. Failure to request from the seller a price discount for undisclosed and contingent repairs, maintenance, tenant issues, lost rent and other negative items discovered during due diligence.
17. Failure to anticipate Unrelated Business Taxable Income and ERISA issues for tax-exempt investors.
18. Failure to calculate and verify common area maintenance billings for commercial properties.
19. Not remeasuring the usable and rentable square footage of commercial properties.
20. Failure to calculate accurately and underwrite the new property tax assessment and real estate tax expense.

Eliminating the above acquisition mistakes, can lower the risk of new real estate investments.

Joseph J. Ori is executive managing director of Paramount Capital Corp.