In Focus: Industrial Site Selection Due Diligence - Foregoing Assumptions
Assessing an industrial site and planning for its development are critical steps in choosing the right location. To successfully undertake this task, one must forego assumptions and seek diligence.
Q4 / Fall 2013
While site certification programs are helpful in quickly identifying site attributes, these programs were never intended to be all-encompassing. The programs just weren’t designed to replace thoroughly assessing a site for suitability to specific, individual users. That responsibility resides with the site selector and the company to make the decision on the location for the business’ new home. Site selection decisions are optimally made following a thorough site diligence investigation.
Why Diligence Matters
The average American will state that the largest capital investment they will make in their lifetime will be their homes. Now, if you own a home, consider all of the diligence you underwent in making the decision to purchase. You likely checked the school district, the transportation routes to areas of personal significance, the home’s condition, the property’s suitability, the property tax rates, and the proximity to services. Diligence matters.
Now, consider the site selection process for an industry. Company representatives are making multimillion- if not multibillion-dollar capital investments when they invest in a site. The products they produce require significant infrastructure support and capacity. Labor matters. Roads matter. Rail matters. Zoning matters. Other analytical, site preparedness items matter. Timeliness to market is paramount. An underestimation of a site’s ability to serve specific industrial needs can result in catastrophic outcomes, including closures, layoffs, or worse. Diligence matters.
It is critical for companies to thoroughly perform the due diligence and planning of industrial sites as part of the location decision-making process. Companies simply cannot afford to take a risk on a “maybe this site can serve” or “we think we can obtain property control.” Absolutely, without a doubt, risk avoidance in the form of site preparedness is crucial to site selection decisions.
Site selection has evolved considerably over the last few decades. As companies have become more efficient in their processes, the timelines for selecting new sites have become shorter. The shortened duration of time to vet sites under consideration can lead site selectors and company decision-makers toward a path of least resistance, creating an environment where important site attributes are missed prior to selecting the final site for development. This mistake can lead to costly development delays and missed opportunities. As many as 75 different site and community attributes may be needed to provide an in-depth analysis of a company’s ability to function at optimum efficiency. Identifying the risk-to-development factors is not only wise, but also assists the site selector and company in playing the selection game intelligently.
Put in the Time to Reap the Rewards
The benefits of a thorough diligence assessment and site planning are vast and provide advantages beyond simply checking off infrastructure capacity. Here are a few items that you may not have considered:
Incentives negotiation: Recently, I worked with a client who was looking at investing nearly $500 million at a site in the Midwest. It was discovered that nearly $1 million would be made available in working capital (cash) incentive to the company, among other tax and work force incentives. As part of the site’s underwriting, I assisted the company with performing a thorough diligence assessment. It was discovered through this assessment that the state’s Department of Transportation would require an additional turn-lane for access due to increased truck traffic. Designing and permitting a turn-lane off of a state highway is approximately a nine-month process. In addition, the company would need a water study to assess availability, volume, and pressure to assure compatibility with its production needs, posing the need for an assessment that would take up to six months to complete.
The math proves that if this company were to be delayed in time-to-production due to permitting issues or undiscovered infrastructure capacity deficiencies, $1 million would be eaten up in lost profitability in less than one week. One week! Site preparedness assists communities in crafting incentives packages that truly add to bottom-line profits, well beyond what working capital investment would have provided. Thorough site diligence allows site selectors and companies the ability to negotiate incentives that provide the most impact.
Company protection: Local planning and zoning policies often provide little protection for primary or industrial companies. In many instances, future land use maps reserve peripheral, low-resource land tracts for industrial uses. The zoning code that governs these areas allows for a variety of uses, some of which could be detrimental to industrial companies.
Land use laws provide some of the highest level of protection to residential, commercial, and retail areas, with industrial receiving the least protection. Noise, smells, dust, and other normal aspects of industrial production could cause operational shutdowns due to encroachment of incompatible uses. Consider this: Industrial companies often provide the highest levels of local, taxable capital investment and jobs; have the least zoning protection; and can be forced out of production due to encroachment of incompatible peripheral developments. Industrial companies can be provided greater protection if site selectors and company decision-makers take the time to thoroughly assess how their sites will serve their facilities and if the sites are zoned properly to protect them from adjacent users. Diligence is a necessary task in mitigating risk to production.
Industrial tract optimization: A crucial aspect of the site selection process is that of site master planning. Master planning allows the company to visualize how the tract configures into the larger area. These plans effectively accommodate drainage, access, and other easement issues, while allowing for optimization of tract development. Too often, companies opt to purchase much larger tracts of ground than necessary for current or project future growth needs simply to protect operations from encumbrance of nearby users. Through diligence assessment and planning, companies can save critical resources by limiting the amount of land purchased to the amount of land needed. The company wins through cost-savings. The community wins through preserved land tracts and optimization of costly infrastructure for future development that may benefit the existing users.
Site selection decisions are largely made by determining a location where the costs to produce are less and the bottom-line profits will be more. Foregoing assumptions on site preparedness and practicing thorough site diligence is crucial to successful development.
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