Daily Archives: April 8, 2013

Money Does Matter in Due Diligence

By Carrie Rossenfeld | San Diego – GlobeSt.com

SOLANA BEACH, CA-In the world of environmental due-diligence reports, knowing what each report does, how much they cost, what’s necessary and what’s not is of vital importance. More than 1,700 people attended a webinar this week hosted by GlobeSt.com, titled, “Due Diligence 101–Third-Party Reports from A to Z,” in which locally based Partner Engineering and Science, Inc.’s Joe Derhake, president, and Jenny Redlin, principal, discussed these matters and more related to due-diligence reports.

To view the webinar on-demand through July 2, 2013, click here. (Note: While the webinar will be viewable in Firefox, the preferred browser in which to view this event is Internet Explorer.)

Derhake started out by stating that money does indeed matter in due diligence because “99% of our clients are stewards of other people’s money.” Underwriting model assets is a chief concern, and when you know the ropes of due-diligence reports, everybody makes money.

Redlin explained that environmental due diligence—while it sounds like “hippie tree-hugger” fodder—actually comes down to protecting your investment. “You need to understand and weigh the risks associated with that investment.” Knowing if there’s ever been a risk of hazardous materials released form the property or contamination associated with that property is important, and doing proper due diligence protects you from liability.

The most common use of environmental due diligence is the Phase I Environmental Site Assessment, of which the 1527-05 is the gold standard. Phase I ESAs include a site visit, searches for historical and government records, and other available information. In addition, the Phase I determines if surrounding properties impact the subject properties.

For those investors who don’t want to spend the money on a full Phase I ESA—which costs between $1,800 and $2,500—smaller transactions can be performed. A transaction screen, the most commonly used smaller transaction, consists of the same elements as a full Phase I ESA, but doesn’t include an exhaustive search. Also, pieces of the Phase I can be done a la carte at a fraction of the price, Redlin pointed out. These smaller reports “should only be used for business-decision processes. They do not protect from liability.”

Generally, Phase I ESAs take about three weeks to complete, but some of the information may not be readily available and can take many weeks to obtain. “Waiting for these records can be extremely important,” said Redlin.

Also, it’s important to give the consultant performing the due diligence as much information on the property as possible before the search. “Sometimes the ordering person doesn’t have many details on the property,” said Redlin. “We’ll work with you to determine what’s important.”

Additional items to the standard Phase I ESA include searches for lead-based paint, asbestos, radon, mold and Chinese drywall. These items are add-ons and cost extra, so you need to specify if you want them.

When you receive the results of your Phase I ESA, look for the statement “no further actions recommended,” or “NFA,” which is a great place to start if you only have 30 seconds to look at the report, said Redlin. “REC” or “recognized environmental condition” means the situation needs further investigation, and some investors walk away from the deal when they receive this result.

If you want to delve further, you can order a Phase II ESA, which takes between three and five weeks to process. Prices vary depending on what will be analyzed.

Derhake explained what other results mean in a due-diligence report. Recommendations may be made for immediate repairs, which covers all repairs the consultant thinks are necessary. Replacement reserves predict major capital expenditures, and the way this data is expressed changes according to asset class.

In ASTM PCA Scope work, a walk-through survey is done on the property. “We look for easily visible and readily accessible deficiencies,” said Derhake. “Some deficiencies are invisible or we can’t get to them for some reason.”

When considering a professional to do a site assessment, ask for one that has at least five years of experience, is a registered engineer or architect, and specify the extent of the inspection you want: 10% of the units or 100% of the units, for example. Also, make the engineer aware of any extras they might need, such as a ladder for roof access, or anything they should know such as if the building is dilapidated and the roof may not be safe on which to walk.

PCA work includes some general assessments, but may not include subspecialists such as a roof assessment that requires an infrared camera, an MEP engineer for an air-conditioning unit, or specialists in elevators, ADA compliance or façades. “We may bring these specialists in, which alters the price.”

Ordering the right report is key to saving money. For example, an ASTM PCA report runs between $2,000 and $3,000, while an Equity PCA, which has a SWAT-Team approach and is more custom, can cost between $5,000 and $50,000, says Derhake. ALTA land surveys can cost between $3,000 and $6,000, and that doesn’t include extras like underground utilizes, flood-zone issues, etc. A zoning report can cost between $600 and $800 and can cover issues such as whether or not a site is “under-parked” or doesn’t have enough handicap spots, whether signage is out of compliance, if there are unpermitted subdivisions of space, bootleg property uses, if accessory buildings encroach onto yard setback requirements, if the landscaping is inadequate, if the floor area ratio is greater than prescribed, or if there are issues with a threshold for a rebuild. Here’s where the capital source really matters, as is knowing what’s important for what to search.

“When things get complicated, it really helps if we have a relationship with our client,” said Derhake. “When things get hairy on that one-in-10 deal, we can give better advice and understand a client’s risk tolerance if we already have a relationship with them.”