Property due diligence can sometimes feel like a hindrance to real estate transactions, a necessary evil on the long road to a done-deal. With the internet at your fingertips and much information about the history of real estate in most major cites publicly available, third party due diligence can be mistaken for bureaucratic red-tape, offering little benefit to the Commercial Real Estate (CRE) investor or lender. Of course you know you need Environmental and Engineering Assessments (such as a Phase I Environmental Site Assessment and a Property Condition Assessment) before closing a deal. What you may not recognize is the plethora of reasons you should actually want them.
ASTM provides generalized national standards for performing a baseline Phase I ESAs (ASTM E1527-13), Phase II Environmental Site Assessments (ASTM E1903-11) and Property Condition Assessments (ASTM E2018-15). But when it comes to property due diligence, location is everything! The due diligence process must consider local specifics in order to comprehensively understand and manage risk. This is particularly true in a city like New York which, in addition to being the home of some of the country’s oldest and most iconic properties, has some of the country’s most stringent and complex regulations. Combine this with a CRE industry that truly never sleeps, it is of the upmost importance that lenders, investors, and sellers alike understand the impacts that the local CRE landscape will have on a prospective property, not only during the real estate transaction, but for the future life of the asset.
Why Due Diligence Matters in New York
Engaging a consulting firm during due diligence can pay off for anyone involved in commercial real estate transactions in New York, saving them time, money, stress, and endless head-scratching. In a city as well-established as New York, where environmental/engineering risk is a likelihood, a knowledgeable, qualified due diligence firm can help you pivot the focus from risk avoidance to proactive risk management. What are some of the New York-specific things that a thorough due diligence process will ensure?
- Adherence to E-Designation Measures: The New York City Office of Environmental Remediation (OER) has recently placed restrictive environmental reviews on property being built or re-zoned on historically industrial use only parcels throughout the state. Placement of an e-designation on your property can mean hazardous materials contamination, high ambient noise levels, or air emission concerns. Engaging a professional consultant can help in understanding exactly what applies to your property and the implications that it can have when contemplating any renovations or making changes in property use as well as finding the most cost effective route to compliance.
- Compliance with New York Health and Safety Regulation: Understanding the property’s historical and/or intended usage is critical information obtained during due diligence which will pay off in dividends to the investor. Knowing the history of a given asset can safeguard the property owner from inadvertently breaking Environmental Protection laws. After September 11th, 2001, the New York City Department of Environmental Protection (NYCDEP) created the Community Right-to-Know law. This law requires that all businesses in the five boroughs handling or storing hazardous materials annually file a Tier II to the Department of Environmental Protection (DEP). Noncompliance with this law can result in hefty fines. Some due diligence firms may offer right-to-know inventory and auditing services and management.
- Paperwork is filed correctly the first time: There are countless regulatory authorities in New York City that govern or play a role in commercial real estate transactions and development in one way or another. It can get confusing trying to figure out who to engage and when. Having the right due diligence consultant to guide you through the regulatory process can help you achieve compliance much more efficiently. As an example, when environmental contamination is encountered at a site, an experienced consultant will consider all applicable regulations and the needs of parties involved to advise whether to engage the NYCDEP (city-level) or the NYDEC (state-level).
- The right professionals are hired: New York State Law dictates that, “Only a person licensed or otherwise authorized under this article shall practice engineering/land surveying or use the title ‘professional engineer/land surveyor’”. Unauthorized practice is considered a class E felony, leaving the offending party open to probation of up to 4 years and your investment compromised.
- Your Part of the Solution: Enacted in 2007, PlaNYC, the City’s groundbreaking effort to address long term challenges (including climate change), has led to a six-part energy efficiently legislation requiring all new construction and retrofitting’s comply with the city’s energy code. These codes are long and arduous, but a compliance assessment can be included as part of your due diligence process. Should you learn that the asset is non-compliant, a skilled consultant can recommend and implement the required energy efficiency measures and help navigate the endless incentives available to offset the cost to achieve improved energy efficiency.
When it comes to navigating the specifics of NY’s local CRE landscape, it really pays to have a local, well-informed assessor by your side. The right background and experience can make all the difference when it matters most.