Top 10 Silly Assumption CRE Investors Make

In honor of the final Late Show with David Letterman this week, here's a commercial real estate version of his regular Top Ten List segment: ten common due diligence assumptions investors make that put them on thin ice!

1. “Well, this property has always been residential, so there aren't any environmental issues to be concerned about”.  But what about the adjacent properties?  Serious contamination could be migrating from the gas station next door or the drycleaner across the road, and then your neighbor's problem becomes your problem!  So make sure you understand potential migration and encroachment risks before moving ahead with a deal.
   
   
2.  “No thanks, this property isn't in California so I'm not interested in getting a PML or considering a seismic retrofit.”  Well, you might want to think again – a number of other regions in the US, such as Arkansas, South Carolina and Tennessee, are also seismic hotspots!  Probable Maximum Loss (PML) assessments may be required by lenders outside of the west coast region, and addressing the seismic resilience of your property can improve its marketability regardless of whether a local ordinance or lender specifically requires it.
   
   
3. “Ok ok, so the parking at my property isn't exactly ADA compliant, but it's an old property.  I'm sure it's grandfathered in so I'll be fine”.   The ADA is a retroactive law with no grandfathering clause, so any business that is a public accommodation needs to comply.  Accessibility related lawsuits continue to be on the rise, and your best approach to avoiding this is it to be proactive, know where your building falls short, order an accessibility survey, and create a plan and schedule to have your property comply with the law. 
   
   
4. “My budget's pretty limited. Just give me your standard assessment just to satisfy the lenders' requirements.”  Often, a standard due diligence assessment done to ASTM standards is sufficient. However, remember that once an asset is on your books, so are the liabilities and costs associated with it.  If your institution is more risk averse, it may pay to request “the full kit and caboodle” (we'll know what you mean…) to more comprehensively assess the building's condition before closing deals. While it increases costs, adding specialists to the property condition assessment will add depth that can help protect investors from bad purchases, provide information for price negotiations and identify opportunities to improve building value post-purchase.
   
   
5. “I found an old Phase I ESA! Why reinvent the wheel, let's just use this.”  Even if there have been no operations on-site (or nearby) that may have caused contamination since the old report was created, you need to have a Phase I that's less than a year old in order to obtain protection from CERCLA liability.  In this case, your hand-me-downs just won't cut it.
   
   
6. “I got a PCA done, and although there were lots of little signs of distress there was nothing major.  Clearly the building isn't built on quicksand, so no need for a geotech report!” The many seemingly small distress items identified by the PCA (which may include things like floor and wall cracking, moisture infiltration, undermined slabs on grade or pavements, racking windows and doors, buckled veneers, etc) may actually reveal a pattern of distress that indicates ongoing soil movement.  Even a quick, limited geotech evaluation could uncover this, and help you decide if further investigation is warranted.
   
   
7. “I would never accept a seller's report – they're clearly going to give a distorted picture!”  Actually, with a reliance letter from a reputable firm a report initially commissioned by a seller can give you some great information to help you make early-stage investment decisions.
   
   
8. “My redevelopment is awesome! I'm cleaning up the land, bringing business to the area, attracting shoppers, even regenerating the landscape….. There's no way council will stand in the way of this.” Zoning codes can be a dream-killer.  Make sure that what you propose to do with a site – whether it's a ground-up build or adaptive reuse project – is allowed under current zoning regulations.  If not, consider applying for a rezoning - while often a cumbersome process, this can be a very worthwhile exercise.  You don't get what you don't ask for!
   
   
9. “My building was built in 1990, surely there's no asbestos there, I'll just demo it.”   That's a common misconception but actually, the age of the building does not serve as a determining factor as to whether a building contains asbestos or is subject to asbestos regulation (see EPA's clarification here.) While most friable (i.e. easily crushed by hand pressure) asbestos containing materials are banned, other forms of asbestos continue to be used in many current building products. The EPA's National Emissions Standards for Hazardous Air Pollutants (NESHAPs) requires that a thorough asbestos survey be conducted before the demolition or renovation, no matter the date of original construction.
   
   
10.  “You're hosting a webinar that'll set me up for success by showing me how to get ahead of due diligence issues? Ah, I think I'll skip it.” Bad decision! This is the most exciting webinar ever, so make sure you register here.