Anne L. Leifer is a project manager with GEI Consultants, a geotechnical, environmental and water resource engineering firm. Catherine Gabis Johnson is a project manager at the firm.

Everyone knows that due diligence is a standard part of a property acquisition – a box to check off on your way to financing. But what is your purpose in buying a property? Usually it’s development, ranging from renovating an existing building to construction of entirely new buildings. If you plan to develop property, due diligence should be more than that box – it should be part of your entire development scheme.

A number of factors affect the development of a property – soil and groundwater contamination, soil suitability for foundation construction, soil suitability for constructing stormwater drainage, likelihood of flooding, wetlands, zoning setback and height requirements, depth to the water table, traffic issues, potential opposition of the neighbors, and the list goes on. Very often, the cost of development is de-pendent on how these factors are resolved for the best configuration for the project. For example, the wetlands assessment and zoning may indicate one part of the property is the best for a building; but that portion may be where the worst soil conditions for a foundation or the highest levels of contamination are located, indicating that construction costs in that area may be considerably higher than the budget allows. How do you juggle these factors?

Figuring out these issues before you close the deal can save a world of headaches after you close, or save you from buying a property that is basically unbuildable for the use and budget you have in mind.

In general, a company buying a property hires a consultant to perform an ASTM Phase I Environmental Site Assessment – and only the ESA. They may hire other consultants to perform a structural survey, wetlands mapping, or a review of zoning and building requirements, or they may not. This approach often leads to something being missed, and only after purchase does it become clear that development won’t be as easy as anticipated. Examples include:

• Geotechnical foundation investigation. This is one item that is often overlooked, despite the fact that it can help you understand construction costs, especially when combined with the results of other investigations. For example, the ESA may identify contaminated soil present, but at concentrations low enough to be left in place. However, the geotechnical investigation may indicate that these same soils are unsuitable for a building foundation and need to be excavated or improved in some way. The cost of soil disposal now comes into play and suddenly something that wasn’t included in the budget becomes a significant development factor.

• Wetlands and flooding. Wetlands and rivers can have a significant impact on the amount of a property that can be developed, de-pending on their location and extent. Flooding also is an issue both for the actual cost of a flood and the added cost of insurance in many flood prone areas. FEMA flood zone maps aren’t always sufficient; during Hurricane Katrina, properties in Mississippi almost two miles away from the coast were affected by the storm surge. An expert opinion is a valuable investment for making flood assessments prior to purchase.

• Building elements. Asbestos surveys are common and transformers are routinely evaluated for polychlorinated biphenyls. Other building features that increase your demolition and/or development costs include mercury and PCBs in electrical switches and lights, radioactive components of emergency exit signs, and corroded or clogged sewer lines, which may leave openings for industrial waste to contaminate the subsurface. Previously unknown drywells or septic systems, some of them still connected to the plumbing system, can lurk undetected until you uncover them during construction. PCBs were historically used in many things besides transformers – paint, window caulking, and electrical insulation among them. Dealing with all of these things costs money, and identifying as many of them as you can as far ahead of time as possible is a good idea.

Different consulting firms are often hired to perform the different parts of a due diligence. Some firms have the expertise to perform several parts of the project, though few can do all of them. Whomever you hire, make sure that the consultants communicate their preliminary findings with each other as well as with you. This avoids duplication of effort and often one consultant uncovers information very useful to other members of the team.

On a recent due diligence project where major construction was planned, test pits were excavated by the environmental/geotechnical firm in order to investigate soil conditions. Soil samples were collected for chemical analysis and to perform geotechnical testing for foundation recommendations. The site civil consultant also performed percolation tests in the test pits to collect information for the site drainage plans because a high groundwater table was a concern at the site. One set of test pits was used for three investigations, saving the client considerable expense.

Future Plans

Your plans are important. The due diligence program should be designed to focus on what you plan to build so that necessary information will be collected and money will not be wasted looking at things that won’t matter, such as testing for drinking water parameters when the development will use a municipal water supply. The information gathered during the due diligence should be useful for planning and development – ideally it will be used to make decisions on whether to go through with the deal. It is important, therefore, to focus on collecting the information most likely to affect development costs.

Geotechnical investigations, for example, are designed to gain the information needed to develop preliminary foundation recommendations. Details of construction can factor in as well. If the warehouse will be built with super-flat floors to accommodate automated material retrieval systems, this will be a factor in the foundation investigation, analysis, and design.

The use of environmental data can also be affected by the proposed use of the property. Many states have different contaminant cleanup standards depending on the proposed use. If, for example, low levels of solvents are present in an area where a large parking lot is planned, only the relatively small costs associated with construction in contaminated soil are likely to be a concern; in many states the groundwater contamination will not have to be cleaned up. If, however, those solvents are present in an area where a large residential development is planned, the costs of cleaning up or mitigating the contamination to address residential standards will have to be factored into site development costs. The first situation may only be a minor issue, but the second could kill the deal, or at least alter the price.

Obviously, the final decision whether or not to purchase a property is yours. However, the members of your acquisitions team such as consultants, attorneys, and financial advisers are the ones who can supply you with the information you need to make key decision. They identify potential problems, prepare preliminary cost estimates, and develop alternative scenarios so that you can make informed decisions. Development of alternative scenarios is especially important – due diligence may identify factors that increase the cost of your initial construction plan, but may also identify ways to move or change things, resulting in a construction cost that is within your budget.

Identification of environmental problems doesn’t have to be the signal to walk away from the deal. Negotiations with the seller can re-sult in the cost and uncertainty being lowered to levels you can live with. While your attorneys will play the largest part in this part of the acquisition, your consultants can play a substantial role as well.

Once you’ve closed the deal, don’t toss those reports into a file never to be seen again. The information contained in them can help with the next stages of planning and construction. It can also be useful to revisit the reports in the planning stage and identify issues that need further evaluation.

And lastly – plans change. Something may not have been identified as an issue during due diligence, but if plans change, you may need to investigate further to see if it poses a problem as a result of that change.

A comprehensive approach to due diligence can help you identify problems and identify solutions before purchase. Communication with your due diligence team throughout the process can result in developing plans that can work.

Comprehensive Due Diligence Can Save Time, Prevent Mistakes

by Banker & Tradesman time to read: 6 min
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