Anne L. Leifer, PG, LSP, Catherine Gabis Johnson, PG; GEI Consultants (Jun/Jul 07)
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 dependent 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.
What Gets Missed
In general, a company buying a property hires a consultant to perform an ASTM Phase I Environmental Site Assessment (ESA) - 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, depending 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 (PCBs). 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.
Who Knows What?
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. Alternatively, some firms have a history of working on project teams together and are used to sharing information and resources with each other. 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.
In another case, during an ASTM Phase I site assessment on an old industrial property, information was uncovered that a mill pond had been present on the property from the 1800s to 1900s. No maps could be found in the municipal offices or in any of the other standard ASTM historical sources showing the location of the pond. However, when the surveyor went to the Registry of Deeds to find the previously recorded survey plans of the property, he discovered a plan from the 1920s showing the location of the mill pond. With that, the environmental consultant was able to plan the ASTM Phase II drilling program to include borings in the location of the former mill pond, rather than placing random borings in the hopes of finding the material used to fill the pond, which did turn out to contain metals contamination.
Your plans are important for two reasons:
• Due diligence costs: 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. If, for example, the development will use a municipal water supply, you likely do not need to test your groundwater for drinking water parameters.
• Planning and development costs: The information gathered during the due diligence should be useful to you - 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. The scope of the investigation is different depending on whether the development plan is for a slab-on-grade warehouse versus a six-story underground parking garage. 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.
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
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.
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
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
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 www.geiconsultants.com.