20 Common CRE Acquisition Mistakes to Avoid
One of the most critical procedures involved in acquiring commercial real estate is the acquisition process. It includes soliciting deals from brokers and sellers, visiting properties, analyzing markets, underwriting, conducting thorough due diligence, negotiating purchase and sale agreements, arranging debt and equity, and closing of the purchases themselves. Many investors make costly blunders during the acquisition process, and here are 20 of the most common mistakes to avoid:
Relying on the broker/seller regarding property and tenant data without independent verification.
Failure to read and abstract all tenant leases on commercial properties.
Failure to obtain tenant estoppel letters from the major tenants and for at least 75% of the rentable square footage of a commercial property.
Failure to verify tenant sales on retail properties, especially the anchor tenants.
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.
Undetected or hidden formula errors within underwriting models.
Failure to complete a thorough physical inspection and engineering report on the property and each property in a large portfolio acquisition.
Agreeing to allow the seller to provide no representations and warranties regarding the property.
Senior management of the purchasing firm not visiting the property and market prior to closing.
Failure to perform credit due diligence and financial analysis on the major tenants, especially retail tenants.
Not anticipating the lender’s lockbox requirement for rent collections for the new property loan.
Failure to prepare a schedule and provide a funding mechanism for property capital improvements.
Failure to reconcile an apartment property’s yearly effective gross income to the seller’s yearly cash deposits on the bank account statement.
Failure to review the tax returns for the entity that owns the property.
Not preparing a scenario analysis of the property underwriting with at least a “most likely” and “pessimistic” outlook.
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.
Failure to anticipate Unrelated Business Taxable Income and ERISA issues for tax-exempt investors.
Failure to calculate and verify common area maintenance billings.
Not remeasuring the usable and rentable square footage.
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. Contact the experts at Realty Capital Analytics to further discuss your situation and how we can help.