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Capitalize on Due Diligence: Efforts Save Time, Prevent Mistakes

More than just a step in the site selection process, comprehensive due diligence uncovers important information that can save time and prevent costly mistakes.

Jun/Jul 07
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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.

Making the Deal
• Construction planning: 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.

The basic example of this is soil removal. In older industrial or urban areas, the due diligence investigation often identifies contaminated soil that must be excavated and disposed of offsite. The cost of disposal can vary from $30 per ton to more than $200 per ton, depending on the level and type of contaminants. The difference can quickly increase your costs if large amounts of soil must be excavated. Minimize the amount of soil removed and you minimize the cost. Sometimes it's no more complicated than switching the location of the parking lot and the building, or it may involve creative suggestions for building foundations that minimize the amount of contaminated soil that must be removed. Regardless, you want to know whether a solution is possible or not before you close.

• Seller negotiations: Identification of environmental problems doesn't have to be the signal to walk away from the deal. Negotiations with the seller can result 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.

For example, a property that had been occupied by a high-tech industry for more than 30 years had a number of potential problems identified during due diligence. Some issues, such as fuel oil underground storage tanks, were relatively straightforward; others, such as cleaning radioactive contamination from drain pipes, were not. A plan was developed that split potential problems into three categories: things for which a compensating reduction in purchase price was demanded; things that were to be cleaned up by the seller prior to closing; and things for which the seller would retain the liability. The consultant worked closely with the attorneys to develop the list and the associated cost estimates. The buyer and seller ultimately agreed to the plan, the buyer's consultants reviewed all of the remedial actions done by the seller, and the property was purchased and redeveloped.

Alternatives to the scenario above could above include placing money in escrow to cover cleanup costs, buying environmental insurance, or demanding the seller hand over a clean - as defined by you - site.

Keep Your Reports Handy
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. For example, the contaminated groundwater that wasn't going to be a problem because the development would have a municipal water supply can suddenly become a problem when the town or county planning authority decides that your development needs its own drinking water or irrigation wells.

In conclusion, 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.

Anne L. Leifer, PG, LSP, is a project manager with GEI Consultants, one of the nation's leading geotechnical, environmental, and water resource engineering firms. She has more than 20 years of consulting experience, concentrating on site investigations, property acquisitions, and property development. Catherine Gabis Johnson, PG, is a project manager with GEI Consultants, and has 15 years of consulting experience, particularly in the areas of site assessment, property acquisition, and property management. For more information or to contact the authors, please visit

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