The Most Common CRE Acquisition Mistakes
One of the most important procedures involved in acquiring a commercial real estate asset is the acquisition process. The acquisition process includes soliciting deals from brokers and sellers, visiting the property, underwriting the property, due diligence, negotiating the purchase and sale agreement, arranging the debt and equity capital, and closing the purchase. I have compiled a list of the 15 most common mistakes made during an acquisition, both from my personal experience and speaking with other industry professionals.
- Relying on the broker and/or seller to provide property & tenant data without independent verification.
- Failure to abstract all tenant leases and failure to inspect and verify all vacant suites prior to closing.
- Not hiring exclusive legal counsel to draft and review all documents.
- Relying solely on the acquisition tam to prepare the underwriting proforma of the deal, instead of having an independent group prepare a separate pro forma. Undetected formula errors in the Excel or Argus worksheets can be catastrophic.
- Failure to complete a thorough physical inspection and engineering report on the property.
- Agreeing to allow the seller to provide no representations and warranties regarding the property.
- Executive management for the buyer not visiting he property prior to closing.
- Not having a gap or bridge loan facility to close the transaction and until the equity is raised and invested.
- Failure to perform credit due diligence and financial analysis on the major tenants.
- Failure to prepare a schedule and provide a funding mechanism for property capital improvements.
- Not preparing a scenario or sensitivity analysis with at least a “most likely”, a “pessimistic”, and a “worst-case” outlook.
- Failure to request from the seller a price discount for unknown and contingent repairs, maintenance, tenant issues, lost rent, and other negative items discovered during due diligence.
- Failure to accurately calculate and underwrite the new property tax assessment ad real estate tax expense.
- Failure to calculate and verify common area maintenance expenses
- Not re-measuring and verifying the usable and rentable square footage numbers
You may have noticed that most of these start with “Failure to”. All of these mistakes can be easily avoided provided you do not try to cut corners and give your team sufficient lead time to properly complete all steps in the process.