By James A. Schnur, CCIM
President and Designated Managing Broker
Integrated Real Estate Solutions
LinkedIn
Every business transaction carries a level of risk to all related parties. But due diligence, the thoughtful and thorough investigation of relevant financial, legal, technical, and environmental information prior to a decision, will help mitigate much of the risk. This process proves particularly critical when considering an industrial property transaction. What are industrial property transactions, and why is due diligence critical when engaging in these deals?
Industrial property transactions include the purchase, lease, or sale of real estate designed for industrial operations such as activities related to manufacturing, logistics, and warehousing. They also include the development of properties for these purposes.
The Vital Role of Due Diligence
Why is due diligence especially crucial in industrial real estate compared to other property types? Industrial transactions often involve substantial capital investments, expansive land parcels, and complex zoning regulations. These high-stakes opportunities demand thorough investigation, making due diligence an essential strategy for minimizing risk.
So, who takes on the responsibility of due diligence in these transactions? Primarily, it falls to the buyers or developers, who have the most at stake. They will look to partner with a commercial real estate broker as well as their financial and legal teams. In addition, they will enlist the expertise of consultants specializing in technical and environmental aspects of industrial property transactions to ensure every aspect of the property is properly evaluated.
The Key Components of Due Diligence
Four key components of due diligence for industrial property transactions include legal, financial, technical, and environmental.
- Legal: Before development can begin, the buyer’s legal team must examine the veracity of the property’s title. These legal professionals must ensure the proposed use for the property complies with zoning and land use restrictions. They must study the applicable environmental regulations and determine if the property carries any legal liabilities, such as the need for an environmental clean-up.
- Financial: Financial due diligence includes reviewing any existing leases or income streams, examining past as well as projected operating costs for the new property. The buyer’s financial team will look for any liens and assess the taxes on the property.
- Technical: When deciding to purchase an existing property, the buyer must examine the condition of some important elements such as the building’s structure and its adherence to construction codes, i.e. fire, health, and safety. Any existing machinery should be thoroughly inspected prior to purchase.
- Environmental: Critical elements of environmental due diligence include Phase I and Phase II Environmental Site Assessments (ESAs). Phase I, an initial inspection, focuses on inspection of the site, review of the historical record, and a determination of potential environmental risks. In Phase II, experts examine soil, groundwater, and building material samples to analyze the extent of any existing contamination. These preliminary phases study the previous industrial uses of the property and assess any potential liabilities.
The Risks of Poor or Rushed Due Diligence
- Financial and Legal Costs: Hidden liabilities such as unpaid taxes as well as the need for repairs or renovations heighten the overall cost of the property. These liabilities could threaten financing when lenders asses the major liabilities. Lingering tenant disputes, zoning violations, or outstanding liens could spur lawsuits.
- Environmental Problems: The past activities of existing industrial properties often lend themselves to environmental contamination. Failing to do proper environmental due diligence can lead to future costly cleanup efforts.
- High Stakes Loss: Failing to uncover potential problems, such as the inability to obtain the proper use permit, could severely reduce or even eliminate the future value of obtaining or developing the property.
The Best Practices of Due Diligence
Not merely doing due diligence is important; doing it well is critical. Here are some best practices to ensure a thorough due diligence process.
- Assemble a Multi-disciplinary Team: The four elements of due diligence require the work of experts in a variety of disciplines. A buyer or developer should gather a trusted team of professionals early in the process.
- Enlist Third Party Experts: Among these individuals include third party inspectors and legal experts who can return unbiased and professional analyses.
- Develop a Check List: The buyer or developer working with the team should develop a detailed check list of due diligence items and ensure the team completes each item in a timely manner.
- Prepare a Timeline: Safeguard the process by developing a timeline that gives the team time to complete each item on the checklist before the completion of the transaction.
When preparing to purchase or develop an industrial property, mitigate the substantial risk by planning to do thorough due diligence. Consider enlisting the expertise of consultants who can help develop the checklist and participate on the due diligence team. The professionals at Integrated Real Estate Solutions, Inc. offer real estate brokerage and consulting services to help businesses with all aspects of an industrial property transaction.
Integrated Real Estate Solutions, Inc. provides clients with the in-depth knowledge and experience that is critical to determine the right path to your next move, lease renewal, or strategic repositioning of your real estate portfolio. Contact us or call 847.550.0160 today about your needs and put our success to work for you.
