WALNUT CREEK, CA— The CRE industry is different than all otherindustries in that it is a transaction based model. The lifebloodof the industry is dependent on sale, financing and leasetransactions.

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The most successful companies and individuals in the industryusually complete the most transactions. However, in pursing thesetransactions the same mistakes are made over and over again whichusually results in poor performance, the loss of equity in aproperty or the loss of the property in foreclosure.

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Below are 25 of the biggest mistakes in CRE investing thatare the root cause of bad deals.

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1. Buying properties at low cap rates.

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2. Buying properties because the investment sponsor has idlecash to spend in a commingled or special account fund.

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3. Not diversifying a national portfolio by property type,location and industry.

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4. Not performing property level and financial due diligence onall properties in a portfolio acquisition.

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5. Acquiring properties with negative leverage, i.e., themortgage rate is greater than the cap rate.

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6. Using short term debt to finance a long term real estateasset or portfolio.

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7. In underwriting an acquisition, using a terminal cap ratethat is less than the going in cap rate.

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8. Institutional investors who commit capital to sponsors whohave inexperienced senior management teams. The senior managementteam should have gray hair and been through the two secular CREdownturns of 1987-1992 and 2007-2012.

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9. Using overly optimistic rent projections in underwriting adeal.

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10. Not analyzing the corporate credit of major tenants.

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11. Not analyzing the sales volumes of retail tenants, a keymetric when buying shopping centers.

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12. Performing shoddy engineering due diligence on anacquisition.

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13. Not swapping or collaring floating rate debt.

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14. Using high leverage of more than 75%.

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15. Using convoluted capital stacks with first mortgage debt,multiple mezzanine loans, preferred equity and owner equity.

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16. Not analyzing demographic, economic and social changes inthe market.

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17. Not hiring bright, hardworking and experiencedpersonnel.

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18. Not giving senior level employees an equity interest in thecompany, portfolio or fund.

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19. Assuming real estate entrepreneurs are good corporatemanagers and capital allocators.

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20. Not incorporating the 15 risks of CRE including; cash flow,value, tenant, market, economic, interest rate, inflation, leasing,management, ownership, legal and title, construction, entitlement,liquidity and refinancing into the firm's investment strategy.

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21. Investing in a property sector like hotels and seniorhousing in which the investment firm has no experience.

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22. Not obtaining the Kmart discount when acquiring a portfolioof assets that are usually made up of a few queens, a lot of pigsand the rest in between.

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23. Not understanding that hotels are 70% operating business and30% real estate and senior housing is 80%-90% operating businessand 10%-20% real estate and value is created by superior managementand operational expertise.

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24. Following the institutional herd in buying core real estateassets at low cap rates.

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25. Not checking the formulas in an XL underwriting worksheet,as there is at least one formula error in every underwritingworksheet.

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Joseph Ori is executive managing director of ParamountCapital Corp. The views expressed in this column are the author'sown.

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