Due diligence is a critical key to success in any deal. Too often, we have all seen entrepreneurs jump into a deal only to learn facts and circumstances that could have been avoided with simple and thorough due diligence. Lawrence Cohen, a professional with over 30 years of experience in negotiating real estate deals, shares a few memorable experiences when companies and investors neglected due diligence.

While deals gone awry from a lack of diligence are memorable, so are the mistakes avoided due to adequate and thorough diligence. Below are four of the most memorable mistakes I have encountered during my career.

1. A hotel was purchased in South Miami Beach, Florida with a plan for expansion, only to have that plan thwarted upon finding out months after purchase that the hotel sat in a landmarked historic district and the plans could not be fully implemented.
2. A ground leased property was purchased in Phoenix, Arizona that had 52 more years to run. In this instance, the entrepreneur did not realize that the ground rent reset to fair market value at the 50-year mark and, therefore, he had grossly overpaid for the property.
3. A strip mall in Hollywood, California had most of their leases tied to an anchor tenant occupying a key area. In this instance, the entrepreneur failed to check the financial capability of the anchor tenant (a publicly traded company) and that tenant declared bankruptcy soon after the purchase.
4. In this instance, an entrepreneur had proactively sought our assistance before a potential disaster ensued. An entrepreneur had signed a term sheet for a hotel in Nevada, the lawyers had contracts ready to sign and all the other experts had completed their work satisfactorily. Only a thorough review of the seller’s financial statements, which the potential buyer had used to underwrite the deal, remained. My colleagues found it difficult to access the proper information as the seller was not very cooperative. After a short while, we understood why. The seller’s purported financial statements for the last year had been “cooked” to show 13 months of revenue against 12 months of expenses. The entrepreneur was flabbergasted, but thankful that we were involved and had done our thorough due diligence.

The common threads of these stories remind us to be sure we are fully prepared and have properly vetted all deals. Working with seasoned industry professionals can help avoid any potential problems. Citrin Cooperman’s Real Estate Industry Practice’s team can help by providing all types of financial diligence including business analysis, quality of earnings, projections, balance sheet analysis, and tax structuring. We can also help you assemble a strong team for the other areas of diligence you require and will be your trusted advisor during every step of your journey to a successful deal.