5 Ways Proactive Due Diligence Can Assuage Investors’ Uncertainty
Recent CRE market sluggishness can be a signal of a risk-averse mentality pervading the industry, and one way for sellers and buyers to alleviate their respective apprehensions is to obtain a comprehensive, thorough snapshot of a target property's condition to inform negotiations.
Real Capital Analytics reports investors bought $50.3B in commercial property domestically in January and February, compared to $80.1B in the same two months in 2016. Fear that prices have reached their apex and high valuations are unwarranted can be dispelled by things like environmental due diligence, which validate a property’s long-term viability and potential upside by identifying issues that could interfere with operation, tenant satisfaction and structural integrity.
Here are five ways proactive environmental due diligence can give negotiating parties peace of mind and facilitate deals.
1. More Complete Property Value Assessment
Due diligence assessments conducted by qualified environmental professionals can identify environmental liabilities associated with the current and historical uses of the subject property and those nearby that could adversely affect it. This is particularly important in densely populated, well-developed areas. These liabilities can be quantified in a forecast financial value. The projections can play an important role in the transaction negotiation process by providing a more informed property valuation.
2. Early Identification Of Issues
Some property types, like industrial and life science buildings, warrant careful monitoring and more frequent assessment. These higher-risk property assets often contain sophisticated systems and sensitive instruments, making them more vulnerable to undetected site conditions. They should be considered for an Environmental Site Assessment.
3. Mitigating Risk And Increasing Transactional Fluidity
Risk is inherent in any real estate transaction. Retaining an environmental professional to conduct environmental due diligence gives parties a complete picture of environmental liabilities so they can determine a course of action and assign responsibility. This facilitates and accelerates the transaction process, making negotiations less arduous.
Contaminated sites represent a serious liability for landowners. The Superfund Law renders liability retroactive (even for issues before the law’s implementation in 1980), joint (any potentially responsible party may be held accountable) and strict. Engaging a team to conduct environmental due diligence significantly reduces the likelihood of an unforeseen lawsuit. Commissioning a report before purchasing can be a good negotiating tool. It can force sellers to fix issues or at least share the cost.
4. Operational Success
Conducting thorough environmental due diligence can identify potential environmental impairments to a property. These could impede operation of on-site businesses and negatively affect tenants' experience and retention. Asbestos-containing materials, mold and migration of hazardous chemicals like dry cleaner chemicals or petroleum via an indoor air pathway are examples of dangerous conditions that can manifest.
5. Property Development
Investors evaluating properties for equity acquisition should consider equity-level environmental due diligence. While this has become a standard component of real estate transactions, a higher degree of risk awareness may be warranted for properties that will undergo soil excavation or grading for site development.
Prospective buyers may also want to consider equity-level property condition assessment due diligence, a comprehensive overview of the state of a property's facades, structures and systems. Necessary immediate repairs can be surprising and costly, but reports give capital expenditure recommendations that serve as a path for prudent allocation of repair dollars. The cost of these services is minimal compared to the headaches and long-term operational costs incurred by neglecting them.
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