Physical due diligence is a key component of the decision-making process for restaurant and retail owners when purchasing or leasing a desirable location for a new store. From Phase 1 Environmental Site Assessments (ESA) to ALTA Surveys or Geotechnical Investigations, exactly what due diligence is needed depends on many factors. A one-size-fits-all approach does not work.
Transaction vs. Development
The due diligence process may not be the same for all franchise clients or projects. The necessary scope of work is often times dictated by the type of transaction (sale vs. development), size and location of property being evaluated, terms of the purchase/lease agreement and risk management policy of the client. For example, a regional restaurant chain who is interested in leasing 1,000 square feet of in-line retail space may only be interested in confirmation that the building materials located within the space are not asbestos-containing through an Asbestos Survey. However, a national auto parts provider who is building a new store at a high-traffic intersection may require a Phase 1 Environmental Report, geotechnical investigation, ALTA survey (with full utility service confirmation) and appraisal.
Size of the Client
Many national and international restaurant and retail companies have extensive real estate, construction administration and legal staff readily available in-house to support the data gathering and managerial aspects of completing a transaction from initial site identification through closing. These clients are able to do a sophisticated review of the Phase 1 ESA, Property Condition Report, ALTA surveys, hazardous materials management, appraisals, etc. Many larger corporations also have established specific scopes of work and guidelines that are used in determining what level of environmental report is necessary to satisfy their risk tolerance.
Other local and regionally-based entities may only have one person coordinating the various due diligence functions and rely more on outside assistance to successfully complete and review the documents. These clients may need a bit more guidance from the independent firms who have the experience and knowledge to provide consultation and break down the data into actionable information.
Due Diligence Trends
One of the few positive items that occurred as a result of the latest economic recession is that most everyone associated with commercial real estate has taken a more proactive approach to identifying and addressing appropriate risks, including the retail and restaurant franchise industry. No one wants to encounter any “surprises”. Conducting a proper level of due diligence is paramount to the risk management process. If the client has, or will have, any level of ownership in a proposed property, then at least some level physical due diligence is critical.
With respect to environmental due diligence and liability, the Phase 1 Environmental Site Assessment is the gold standard in risk management for prospective owners, and beyond that sometimes Phase 2 Subsurface Investigations are warranted. However, other less comprehensive environmental reports (such as Desktop/Database Reviews or Transaction Screens) can be prepared to identify associated risks with respect to a owning or developing a property. The key is that every transaction have some necessary due diligence completed prior to closing of the transaction.
Efficiency – Time is Money
Restaurant and retail owners often need more than one environmental and engineering service when purchasing or leasing a property. Shopping around and coordinating these services between several companies is inefficient and may lead to lack of productivity (wasted employee hours) and delay in completing the necessary tasks within the established schedule. Bundled or packaged services offer the client/buyer the opportunity to work with one company who completes all the client-required services.
Bottom line, third party providers need to understand the business model and needs of their restaurant and retail clients to provide the best and most appropriate service.