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CRE Basics: Surveys

By Maura O'Connor

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One often misunderstood basic step in due diligence is the acquisition and review of a survey.  Often, buyers and lenders looking to purchase or make a loan secured by commercial real estate wonder if the cost and delay of obtaining a survey are necessary.  But those of us who have been in the business for a long time, and have seen the many ways even relatively simple deals can go bad, know that the time, money and effort invested in getting a survey is virtually always worthwhile.

Why?

A survey is a map of the real property which meets certain specified technical standards widely accepted in the commercial real estate and title insurance industries.  This special map is produced by a surveyor, and typically takes a few weeks to complete.

A competent survey provides the only reliable information (meaning that you can sue the surveyor if he or she screws up) that can be relied upon to confirm that the land and improvements on it are accurately represented by the words that constitute the legal description of the land. 

Since any transfer of any interest in real property conveys only the property that is described in words in the legal description, making sure that those words actually accurately describe what is being sold is a vital part of the due diligence on any commercial real estate deal.

What can go wrong if no survey is done?  Or if the survey is not properly reviewed?

Well, here are two war stories from my past.  Names have been omitted to protect the guilty!

WAR STORY #1:  A client many years ago was making a construction loan secured by a proposed warehouse somewhere out in the Inland Empire, where logistics is one of the major economic drivers.  For some reason, the survey, which was to show the location of the building to be built, was late – it arrived only the evening before the planned loan closing.  Bleary-eyed after days of tough negotiations, I looked over it, and was jolted wide awake:  the survey showed a street platted right through the middle of the planned building site. 

Quick calls to the surveyor, the developer, and, in the morning, the city planning office disclosed that the area had originally been platted for a subdivision, and that although most of the subdivision streets had been vacated (which meant  that the city had given up its rights to build the streets), this particular street had not been vacated – so at any time, the city had the right to build the street, even If it required the borrower to tear down its multimillion dollar building.  Obviously, this was a risk that neither borrower nor lender was willing to take.  Luckily, the city, which wanted the planned development, was cooperative:  we put the closing off for three days, and in two days, the city council managed to pass a resolution vacating the original “paper street”.

WAR STORY #2:  Back in the last major downturn, in about 1992, when I was still a young associate, I worked for a partner who was, let’s say, a difficult personality.  One of our lender clients gave us a foreclosure to handle, of a $46 million loan secured by two office buildings with a shared parking lot on a property in Orange County.  The partner gave the project to me.  (Our firm had not documented the loan.)  I reviewed the loan documents, title and survey. 

The survey was odd:  it contained a “metes and bounds” description.  The only way to check whether the words in a metes and bounds description are correct is to compare them to the map of the real property shown on the survey, and the surveyor’s “calls”, or technical descriptions of how long and in what direction each boundary line of the land goes.  These read something like, “Go to the first large stone 42 feet north of the intersection of Frick Street and Frack Avenue, then 42 degrees 31 seconds Northwesterly 187 feet, then . . . .” 

Metes and bounds descriptions are meant to trace the boundaries around a piece of land – and the end of the line must meet the beginning, and enclose the shape it draws, in order for the description to convey the property enclosed by the described lines.  (If you ever see a metes and bounds legal description in California, it’s a red flag:  it may mean that the land described has not been properly subdivided in compliance with the California Subdivision Map Act.)  You always have to check these descriptions very carefully. 

So I duly took the legal description and traced it over the property boundary line shown on the survey.  The line went all around four sides of the property, but ultimately did not close.  This had to be a mistake, I thought, so I traced it again.  And again.  Then backwards.  I could not get it to close, no matter what I did.  I hated to ask the partner, who did not tolerate any shortcoming gladly, but I could not figure out how to get the end of the line of the legal description to close around the rectangle – it stopped short of its beginning.  (I was sure I’d screwed up somehow.)

Finally, I went to see the partner, explained the situation, and asked him to look at it.  He was impatient and made it clear he was very sure I’d screwed up somehow.  But he could not make it close either. 

That legal description had been correctly shown on the survey done when the loan was made, but apparently no one had reviewed it, because the deed of trust and other loan documents all used the too short legal description. 

Bottom line, our client had lent $46 million and had received the right to foreclose on a line – not the property inside that line.  (We were, ultimately, able to fix this problem by filing a judicial foreclosure and a motion “nunc pro tunc” which is Latin for “Please, oh please, your Honor, fix this to be like it shoulda been!”  But fixing it cost about $250,000 in legal fees and 9 months delay.  A competent survey review before the loan funded would have avoided these costs.)

A good survey should have the following qualities:

• It should show the land on a map.
• The survey should include a complete copy of the legal description of the land which matches that in the preliminary title report (“PTR”) already obtained from the title insurance company, and the legal description in the last recorded deed by which the current owner of the property took title to the land, word for word.  If there are any discrepancies, they need to be investigated and understood. 
• It should include a drawing of where every easement shown on the PTR is located on the land, and should identify each easement by reference to its number on the PTR. 
• The survey also should show any easements on any neighboring land that benefit the property (such as a right to use a driveway across a neighboring parcel).
• The survey should show all improvements made on the property (including paved areas, fences, walls and any other improvements) and describe each (e.g., a two-story office building).  The survey should show all of the places where buildings or improvements located on the land are located on easement areas or on neighboring properties.  Such places are referred to as “encroachments”, and may be important as the person or entity that owns the easement or neighboring property can sometimes force the owner of the land to tear down and remove any such encroaching buildings or improvements.  In addition, the survey should show all encroachments from neighboring properties onto the property surveyed. 
• The survey should show all driveways leading in and out of the property and the public streets onto which the property abuts and to which it has access.  If there is limited access to the property, such access needs to be confirmed to make sure that the buyer of the property will have sufficient rights to get its vehicles and personnel in and out of the property.
• The survey should show the number of paved and striped parking spaces on the property surveyed.  Many cities and local governments have stringent parking requirements, and any buyer (or lender) needs to know that the land complies with them.
• The survey should contain a certification signed by the surveyor who actually performed the survey certifying who may rely on it and the standards to which the survey has been completed.  Standards for surveys are promulgated by ALTA / ACSM.
• If the survey is done for a lender making a CRE loan, the survey needs to meet the lender’s internal criteria for surveys.

A competent real estate lawyer must review the survey while he or she is reviewing title to the property.  Depending upon what things are shown on an individual survey, a lawyer may notify his or her client of issues shown on the survey that affect how the client will be able to use the land.  (For example, in a development and construction deal, a high pressure gas line can be a problem – if you want to build where it is – or not a problem – if it runs along the edge of your property, away from where you’re building.)

Typically, a good lawyer will resolve many of these issues before the transaction closes.  In addition, it is not unusual for a lawyer to find out that the survey is incorrect in certain respects, and to work with the surveyor and the title insurance company to fix the survey.  But the many problems that a survey discloses can only be discovered if the buyer or lender orders that survey – and avoiding such problems is why a prudent buyer or lender will usually obtain a survey of the real estate it plans to buy or to use to secure its loan.  

(To search across all ALM blogs, go to www.Lexis.com.)