Three Environmental Due Diligence Words to Live By: Anticipate, Anticipate, Anticipate!

Commercial Real Estate, Environmental Due Diligence, Facilities Operations

The Art of the Deal?  No!  The Art of Anticipation is more like it.  Anticipating issues on the ground  is easier if one has an understanding of the deal itself and its objectives.  So by understanding the following, one can anticipate and shore up possible pitfalls:

Scope of Work: One of the more obvious points (we know, trust us).  However, scopes of due diligence vary depending on whom one is representing.  Sellers, buyers and financial institutions have their own guidelines and objectives.  Also, the type of transaction can affect the due diligence approach.

Type of Operations(s):  One size due diligence does not fit all.  Site reconnaissance is all about anticipating what may or may not be present based on the type of facility it is.  Manufacturing?  Distressed real estate?  Deferred building maintenance often results in mold from water damage, damaged asbestos containing materials, PCBs & dilapidated lead based paint.  Anticipating possibilities not only protects the acquirer long term but may also serve as negotiating leverage.

Timing (or lack thereof): To quantify an operations’ environmental compliance posture and outstanding environmental liabilities in short order is part of the business we have chosen.  So, a wise move is to get ahead of the information as best as practical. Previous studies, knowledge of the industry, area and regulatory agencies – submit information requests to all appropriate parties on the front end.  Anticipate data gaps and relay to the deal team/client.

Deal Team Participants – Each Have Their Own Perspective and Duty: Team members such as legal, finance and other advisors will want and need to review the environmental due diligence for not only their input but often times sign-off as well.  Anticipate the time that will be required, the perspective and risk sensitivities they bring to their representation.

The McGovern Group has extensive experience conducting pre-acquisition environmental and building due diligence programs.  Call with your questions.  We look forward to having a conversation!

Joe McGovern

[email protected] 602-418-3949

Hey Due Diligence Team – Listen Up!

Commercial Real Estate, Environmental Due Diligence, Facilities Operations

man-shoutingOk, more like – listen to each other!  Easy right?  Let’s start with the client.  Are we listening to her business objectives?  Timelines?  Do we understand her risk tolerance?  How about legal counsel?  Is he running the due diligence show?  Is the engagement under Attorney – Client Privilege?  Do we know that from the get go?  Do we even know what makes up the deal team?  Have we even asked?

The question checklist can be long, but are you listening?  Client, you too!  In the fast paced world of transactional due diligence, often times we think we need to jump to step 4 to meet the deadline.

“We are going hard on our money next Monday and need to know if there are any deal killers!”

Still ask the questions and listen.  For example: Listen to legal pertaining to when the process and timing of information distribution may be as important as the information itself. Recognize that certain technical findings may trigger legal liability and financial risk – thus presenting findings verbally to the team well before formal reporting is completed is paramount. And, be prepared (prior to being asked) to identify and quantify due diligence issues in terms of cost, timing and regulatory exposure.

We have time to protect our clients’ interests.

For your due diligence questions, contact The McGovern Group for a friendly conversation.  Our team has extensive, and we mean extensive, experience conducting pre-acquisition environmental due diligence programs for buyers, investors, legal counsel, financial institutions and sellers.

What is a Property Condition Assessment?

Commercial Real Estate, Environmental Due Diligence, , , , ,

Commerical Property AssessmentThe purpose of a Property Condition Assessment (PCA) is to observe and report on the physical condition of real estate or property that is being considered for purchasing, leasing, re-financing or simply maintaining. The Property Condition Assessment is conducted by a commercial building inspector according to accepted guidelines of the American Society for Testing and Materials (ASTM) E 2018-15 the only recognized standard of major lenders. Often a Property Condition Assessment is performed as part of a property transfer or in conjunction with a Phase I Environmental Site Assessment.

What is Observed as Part of the Property Condition Assessment?

The Property Condition Assessment Report incorporates the information obtained during a walk-through survey, document review and interviews, and includes Opinions of Probable Costs for suggested remedies of the physical deficiencies identified. In brief, the Property Condition Assessment systems and areas to be inspected may include:

  • Site and Grounds – pavement, curbs, loading docks, walks, landscaping, irrigation, site drainage, exterior lighting, walls, fencing/railings, signage and exterior amenities.
  • Structural Systems – foundations and structural framing of walls, columns, intermediate floors and roofs.
  • Building Structure – roofing systems, exterior finishes, stairs and steps, exterior doors and windows.
  • Interior Building Components – Interior finishes of common areas and tenant areas.
  • Mechanical Systems – property-owned electrical, heating ventilation/ air conditioning, plumbing and conveyance systems.

Why do you Need a Property Condition Assessment?

The professional recommendations from the Property Condition Assessment identify potential financial risk and/or liability to the client. A thorough Property Condition Assessment during due diligence can arm of prospective purchaser with useful information, such as:

  • Immediate repair budgets and longer term capital needs
  • Helps in making a well-informed purchase decision
  • Reduces the level of uncertainty associated with the risk of purchase
  • Can often serve as an effective negotiating tool
  • Helpful in scheduling preventative maintenance
  • Helps to protect a lending institution’s vested interest in a property

As a leading environmental consultant firm, The McGovern Group routinely works with top local and national service provider specialists to provide high environmental and building due diligence services across the United States. For more information about scheduling a Property Condition Assessment or our commercial real estate services, please contact us.

What is a Phase 1 Environmental Site Assessment?

Commercial Real Estate, Environmental Due Diligence, , , , , ,

Environmental Site AssessmentA Phase 1 Environmental Site Assessment is part of a report prepared for a real estate holding that identifies potential or existing environmental contamination liabilities. The Phase 1 Environmental Site Assessment is the first step in the process of environmental due diligence and involves a review of records, site inspection and interviews with owners, occupants, neighbors and local government officials, but does not typically include actual sampling of soil, air, groundwater or building materials. The below article written by Rick Leighton for NAI Global details additional information about what a Phase 1 Environmental Site Assessment is, and what it isn’t:

What is a Phase 1 Environmental Site Assessment?

A Phase 1 Environmental Site Assessment should be an integral step in acquiring commercial and/or industrial property. So what is a Phase 1 Environmental Site Assessment, sometimes referred to as a “Phase 1 or a Phase 1 ESA”?

A Phase 1 Environmental Site Assessment is a report that summarizes a site visit and records review of a property and its surrounding area to determine if any additional environmental investigation is warranted to understand the liability risks associated with the identified property. It should follow and adhere to ASTM Standard 1527-13.

Below is a quick summary of key activities [and process] generally associated with a Phase 1 Environmental Site Assessment:

Purpose of a Phase 1 Environmental Assessment

The purpose of a Phase 1 Environmental Site Assessment is to use a consistent systematic approach the industry recognizes to identify any existing or potential environmental conditions that may be present or affect a real estate property.

The process of completing a Phase 1 Environmental Site Assessment has four components:

1. Records Review

  • Historical uses. What has the property been used for in the past? Are there any uses that raise a red flag based on past usage?
  • Determine surrounding land use. This can be an important part of the assessment as the risk of contamination can increase significantly if the surrounding area or properties have documented or potential contamination.
  • Historical aerial photograph review. A report will almost always include historical aerial photographs to review a time-line for development of the property as well as surrounding properties.
  • Agency contacts and related record searches. Agencies such as fire departments, local health departments, petroleum tank management associations, water departments, etc., generally are contacted in order to gather current and historical pertinent information concerning the property and the neighboring area.

2. Site Reconnaissance

  • A visual inspection of the property and improvements plays an important role in a Phase 1 Environmental Site Assessment.
  • The confines of the building(s) are inspected and property boundary measurements observed. The focus of a Phase 1 inspection is environmental and does not include the structure or any of the systems of the building
  • Photographs are taken of the property.
  • No physical testing or sampling is typically conducted during a Phase 1 Environmental Site Assessment.

3 .Interviews

  • Interviews will be conducted with anyone who may have information that would help with the report. For example, past and present property managers, tenants and owners
  • If there is concern over surrounding properties, interviews may be conducted with people who have been or are involved with that property.
  • Agencies contacted above such as fire departments, local health departments, petroleum tank management associations, water departments, etc., generally are contacted in order to gather current and historical pertinent information concerning the property and the neighboring area.

4. Report

  • Documentation. Findings, opinions and conclusions must be supported by documentation to facilitate the assessment.
  • Scope of Services. The report will describe all services performed in detail to allow for another party to reconstruct the work completed during the investigation.
  • Findings. The Findings section identifies known or suspected recognized environmental conditions.
  • Opinion. Includes the environmental professional’s opinions of the impact on the property of conditions identified in the Findings Section.
  • Additional Investigations. The environmental professional should include an opinion if any additional investigations are necessary to further clarify any findings that may indicate there are environmental concerns.
  • Data Gaps. Should there be any significant data gaps that affect the ability to evaluate the property these need to be identified and commented on.
  • Conclusions. Provides a summary of the tasks completed and determines whether recognized environmental conditions are connected with the property.

Do You Really Need an ALTA Survey?

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Land Surveyor

We are often asked if you really need to conduct an ALTA Survey?

What is an ALTA Survey?

An ALTA Survey is a survey prepared by a licensed surveyor in accordance with detailed standards adopted by the American Land Title Association (ALTA) and the American Congress of Surveying and Mapping (ACSM). In brief, an ALTA survey is a complex report that details the boundary lines, location of any property buildings (including improvements), and the identification of easements (access rights by service companies such as water, gas, telephone, railways and other utilities).

Do you really need an ALTA Survey?

So, do you really need an ALTA Survey for your property? The attorneys at Angell Law Offices put together a great read on some of the deciding factors of whether you really need an ALTA Survey for your property:

When acquiring commercial real estate, it is important to conduct due diligence to ensure there are no surprises that will affect the value or use of the property. One aspect of the due diligence process is considering obtaining an ALTA Survey. The two main reasons for obtaining an ALTA Survey are (i) to satisfy the title insurer’s requirements for the issuance of ALTA title insurance coverage for Survey Risks (defined below), and (ii) to specifically locate both record and non-record matters that affect the property, which can be critical for evaluating whether or on what terms to proceed with an acquisition. This is particularly important when the preliminary title report raises many or difficult-to-locate easements or other similar exceptions, or when the facts on the ground seem complicated.

An ALTA Survey is a survey prepared by a licensed surveyor in accordance with detailed standards adopted by the American Land Title Association (ALTA) and the American Congress of Surveying and Mapping (ACSM). An ALTA Survey maps the property’s boundaries, the location of the improvements on the property, including buildings and other structures, fences, utility lines and installations, trails, paths and roads, etc., and the location of all access, utility and other easements recorded against the property.
For commercial real estate, title companies typically require an ALTA Survey before they will commit to issue title insurance covering the following “Survey Risks:” (1) encroachments, boundary line disputes, or other matters or circumstances that would be disclosed by an accurate survey and inspection of the property; and (2) easements or claims of easements not shown by the public records. In some states, and for certain property types, a less detailed (and less expensive) form of survey, or an improvement location certificate, may suffice to obtain title insurance coverage for Survey Risks.

When to conduct an ALTA survey?

An ALTA survey will identify and locate:

  1. Buildings, fences or other improvements from neighboring properties that encroach onto the property being acquired;
  2. Buildings, fences or other improvements located on the property being acquired that encroach onto neighboring properties;
  3. Buildings, fences and other improvements located on the property being acquired that encroach onto existing easements (utility, access, etc.) located on the property being acquired;
  4. Existing record easements that might have an adverse impact on the use or future (re)development of the property being acquired; and
  5. Potential easements or claims of easements not disclosed in public records but indicated by facts on the ground that might adversely impact the property being acquired.

An ALTA Survey is not legally required and is not always necessary.

It is important to balance the potential risks against the expense of due diligence. For example, if you are acquiring a 30-year-old apartment building in a well-developed urban area, a visual inspection does not raise any concerns about potential boundary disputes or encroachments, and the preliminary title report does not disclose any easements or other record matters of concern, you might feel comfortable forgoing an ALTA Survey and title insurance coverage for Survey Risks. In some cases, you may be able to convince your title insurer to provide coverage for Survey Risks based on a less expensive form of survey or on an improvement location certificate. In general, how detailed and how expensive a survey you need is a question best answered after a site inspection and review of the preliminary title report.

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