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Beyond the Big Four: Dialed-in Due Diligence for CRE Acquisitions

Beyond the Big Four: Dialed-in Due Diligence for CRE Acquisitions

When considering pre-acquisition property due diligence, many savvy investors request the “Big Four”: Phase I Environmental Site Assessment (ESA), Property Condition Assessment (PCA), ALTA Survey, and Zoning Compliance Report.  However, multiple complimentary services are available to help an investor, property owner and/or lender assess potential risk. Depending on the unique features of the property, as well as the buyer’s anticipated use of the property, the Big Four core services may be supplemented with additional evaluations.

Some of these additional assessments will be driven by the location of the property. For example, properties located in seismically active areas, such as those on the west coast of the United States, may warrant a seismic risk assessment. For areas of high potential radon concentration, a radon survey would be beneficial. Properties that do not have a connection to public water and sewer services may require a drinking water evaluation to screen for lead in drinking water, as well as a septic assessment.

For properties where extensive renovations and/or demolition is planned, a hazardous materials building survey that evaluates the potential for asbestos containing materials, lead based paint, PCBs in caulk, mercury containing devices, and other materials that would require special handling and disposal would be informative. Similarly, for properties were potential development is intended, a wetlands and flood plain evaluation should be considered. An environmental lien search to identify Activity and Use Limitations (AUL) and land use restrictions can also yield valuable information pertaining to the property and potential development challenges.

Acquisitions during the coronavirus pandemic may warrant additional assessments as well. At the onset of the pandemic, many buildings were unexpectedly vacated for what was initially understood to be a short period of time but remained vacant for several months. If your target acquisition has been vacant for a prolonged period, consider an industrial hygiene evaluation to ensure that there are no leaking emergency generators or aboveground storage tanks, mold growth due to unbalanced HVAC and/or pipe leaks, or legionella blooms in water chillers. Solutions can be employed to swiftly and cost effectively address these conditions. As we proceed through the economic impacts of the global pandemic, there may be an increase in foreclosure activity. It may be prudent to conduct a regulatory compliance review pre-foreclosure. Should larger environmental issues be identified, a remedial cost estimate and remedial action plan will be developed.

For a potential property owner who wants to ensure appropriate conditions for future occupants and/or tenants, an Indoor Air Quality (IAQ) evaluation can be illustrative. Currently, there is an increased focus on industrial hygiene in commercial properties, primarily driven in response to COVID-19. Many commercial spaces are undergoing deep cleaning. Property owners may want to perform an IH cleaning evaluation on a regular schedule to provide confidence to their occupants.

With so many factors involved, developing a due diligence strategy requires thorough understanding of what tools are available and when to deploy them. You may find it helpful to use a due diligence checklist. Work with your due diligence consultant to develop a risk mitigation protocol that incorporates your business objectives and your level of risk tolerance, as well as the specific attributes of your target acquisition.