Why Due Diligence Is Important In These Bad Economic Times

Every real estate transaction has various levels of due diligence…engineering inspections, title searches, appraisals. Environmental due diligence, especially in these economic times, can influence the sale price of a property and is more important than ever. The sale price of a property can be highly dependant upon the findings of the due diligence. Some of these factors, such as location, property condition and zoning, can be easily evaluated, and therefore, its impact to the sale price easily assessed. If it has a good location for your intended future use, the property immediately becomes more valuable and more desirable; you may be willing to pay a little more because of this.

Unfortunately, environmental issues at a property aren’t so easily observed or obtained. Take for example the former use of a property. It may look like any other 3-story mixed use building; commercial on the ground floor and apartments on the upper floors. Have it vacated, knock it down, put up condos, make a very good profit and move on, right? Sounds simple and it’s been done hundreds of times in good economic times, however, especially in more densely populated areas of the tri-state area, a property like this may have had multiple uses throughout its history. If the property was a former gasoline station or auto body shop, petroleum products may be present underground that can significantly increase both development cost and time, sometimes exceeding $250,000 and 12 months. Even a fuel oil tank no longer in use can have released oil that can cost over $25,000 to clean up.

These types of cleanup costs can easily eat away at your profits. If the property was a former dry cleaner, the cleanup cost may ultimately be more than the property is even worth! Even in good times, any investor or developer knows that is not a good deal. Another example can be drainage structures such as on-site drywells, cesspools or floor drains. An adverse environmental impact to these structures can result in a violation of local regulations. Aside from cleanup costs that commonly approach $50,000, regulators can issue fines that can exceed $10,000 PER DAY!
Are you ready to take on these added costs in these economic times? Hiring Hydro Tech to perform a Phase I Environmental Site Assessment on your behalf can start you down the road to significant cost savings. For a cost typically under $2,000, our Phase I will identify any potential environmental issues. It will also be accepted by all lenders for their necessary due diligence requirement, so if you were to purchase the property for cash and then try to get a construction loan post-closing, the environmental issues won’t preclude you from getting the loan and being stuck with an property that can’t be developed.

If the Phase I identifies issues, performing a Phase II Investigation to assess the potential environmental issues will commonly cost less that $10,000 and will provide you with the recommended cleanup approach and their associated costs. Lenders will also be able to escrow the cleanup costs, which will allow the loan to go through.

With this knowledge gained above, you can continue your real estate transaction knowing cleanup costs ahead of time, which allows you to factor them in to future development plans and also negotiate them off of the sale price.

Spend a little to save a lot? Why yes, with Hydro Tech, this is only a phone call away.

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