Buying an industrial lot, what is typical due diligence?
All the other properties I've owned have been purchased either directly from a municipality, or via tax lien auction, so "due diligence" is either already baked in, or irrelevant as the purchase price is so low I have a lot of risk tolerance.  


I am getting ready to make an offer on a 6+ acre Industrial lot site, the price is such that I've got a lot of tolerance for risk on it, but I would like to get some input on due diligence on the purchase.  


\-It's an all cash deal, so I've got no lending requirements  
\-I'm hyper local and tuned into property pricing so I'm not worried about an appraisal  
\-I already own adjacent property and have a recent Phase I, so most of the information in that will just be duplicated if I got one on the new parcel  
\-Due to it's zoning, I've got "right to use" for my intended development  
\-It has been partially developed and hard surfaced in the past, so I'm pretty confident of the load bearing soils underneath  


What are your thoughts on needing a: ALTA, Zoning Report? Despite my understanding of the prior property use, should I get a Phase I and Geotechnical anyways?  


Anything else I should do??
[{"id": "h1wcib0", "text": "Phase 1 Environmental Site Assessment", "replies": [{"id": "h1x6a8k", "text": "Yes, even  though you have one on your own adjacent parcel. If you were borrowing money your lender would have required it. You get bit by what you don't know.", "replies": [{"id": "h23s0x7", "text": "At some point in the future, the property will have a loan, so it\u2019s smart to vet properties as a lender would because an unbankable property is a future, expensive nightmare. Yes, some of the Phase 1 info will be duplicated from the adjacent report, but the deep dive of the property hasn\u2019t been conducted.", "replies": [], "depth": 3}], "depth": 2}, {"id": "h21tlsx", "text": "Definitely a phase 1 Environmental site assessment", "replies": [], "depth": 2}], "depth": 1}, {"id": "h1wk4n0", "text": "What are you planning to develop onsite?\n\nI would order a Phase 1 1,000,000/1,000,000 times (and that goes double for an industrial site). We once bought a retail strip center that had a former dry cleaner onsite. The Phase 1, ended up saving us over $250,000 of remediation work. The state and federal environmental agencies do not mess around and in the event you buy a \u201cdirty\u201d property it could cost you millions.", "replies": [{"id": "h1wlqjj", "text": "I'm looking at developing high bay multi-tenant commercial space, geared towards skilled trades type businesses.  \n\n\nI have an adjacent property and had a Phase I a year ago for a cash out refi. Looking through it, all the information (outside of the physical visit) would be the same. I can look back on the aerials and see that it has been nothing but farmland and a parking lot since 1936.  \n\n\nDoes the Phase I provide any actual legal cover, or is it more informational?", "replies": [{"id": "h1wp38h", "text": "There are disclaimers that protect the inspector and the company. However Phase 1s also will help identify if there\u2019s a part of the property that may be considered unbuildable (designated wetland for example). $5,000 feels like a big waste of money if it doesn\u2019t find anything. On the other hand, it could save you a whole lot more.\n\nI would also at least call the city to confirm the zoning allows for what you are attempting to do if you do not plan on getting a zoning report.\n\nWe always order a soils report for a development parcel even if we\u2019ve already built on an adjacent parcel.\n\nYou mention not needing financing. Will you need financing once you begin construction? If so, they will probably make you order all this stuff anyways. Might be worth calling a lender and seeing what they\u2019ll require in the future.", "replies": [{"id": "h1x9jhk", "text": "That's a good point on the future lender requirements.\n\nUp until now, I've always done cash for development, got it performing, and then did a cash out refi. Ultimately, the development dollars on this might be a little more than I'm willing to put in, but even if it's not, I'll still need all that stuff for the eventual refi.\n\nHonestly, I'm not even sure why I thought to quibble in my head with this stuff, I know it's a no-brainer \n\nThe offer of the parcel literally just fell in, out of the blue, a few days ago. I'm still wrapping my head around lining all the pieces up. Nothing like an industrial impulse buy.   \ud83d\ude06", "replies": [{"id": "h1z46k6", "text": "Always good to step away or get another set of eyes/thoughts on it. Can be your own worst enemy at times.\n\nGood luck on the deal!", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "h1y5k27", "text": "1 million % recommend doing a Phase I ESA.  \n\nThe Phase I Environmental Site Assessment is one piece that will help towards you doing \u201cAll Appropriate Inquiries\u201d (AAI) for you to meet compliance with the \u201cBona Fide Prospective Purchasers\u201d (BFPP) provision of the Environmental Protection Agency\u2019s (EPA) CERCLA &amp; its amendments (Comprehensive Environmental Response, Compensation and Liability Act).  \n\nThese three links are a must read.  I don\u2019t know if this is the complete info for you or if it is up to date but it will certainly give you critical visibility of what to discuss with your due diligence team which will a the least need to consist of a qualified environmental consulting firm.  CYA disclaimer:  I am not your commercial real estate broker, nor am I a civil engineer, environmental consulting firm, nor legal advisor - I recommend you consult qualified professionals of each of the above.\n\n1. [EPA BFPP](https://www.epa.gov/enforcement/bona-fide-prospective-purchasers#tcco)\n\n2. [Info about EPA\u2019s AAI (third party attorney website)](https://www.environmental-law.net/wp-content/uploads/2011/08/The-New-EPA-AAI-RulePREL-Jan07.pdf)\n\n3. [Biggest Phase I ESA Mistake You Can Make article (use correct corporate entity name of  legal owner, not necessarily developer\u2019s name)](https://www.williamsmullen.com/news/biggest-phase-i-esa-mistake-you-can-make)\n\nA separate note:  you might want to look into the infrastructure gas lines, water, sewer etc. to determine its suitability for your use (i.e. line diameters &amp; capacity as well as condition).  Check with engineers / utility companies / drawings. \n\nIf the lot has an existing structure you might want a Property Condition Report (PCR).   You\u2019ll want to be comfortable with due diligence of the roof, sprinkler, systems, etc etc etc which may require you to also bring in specialists beyond the PCR report for their reports / quotes.\n\nI\u2019m a commercial real estate broker and former owner of multiple industrial manufacturing sites.", "replies": [{"id": "h4nm2r2", "text": "Man I\u2019m glad I was able to read your post. Written very well.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "h25k56s", "text": "^this. Assuming an acquisition is going to be financed with a debt component, almost any major lender is going to require a recognized environmental condition (REC) in a Phase I be remediated or have an O&amp;M plan be put in place as a closing condition. For very serious issues, an upfront escrow of  &gt;100% of the cost estimate will be required to be funded at closing", "replies": [{"id": "h25pxqv", "text": "Our lender required 150% escrow. Not sure how it is handled in other states, but in Colorado, if you do not perform the \u201cremediation plan\u201d (can\u2019t remember the technical name) once you have notified the Colorado Department of Public Health &amp; Environment (CDPHE), you can face jail time!", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "h1ymddw", "text": "Phase 1 AND phase 2 environmental.", "replies": [], "depth": 1}, {"id": "h1zseyy", "text": "I had a big $100,000,000 apartment deal that had traded ownership a couple times before the most purchase and recent phase 1 identified a 100- year old usage as leather tanning place onsite and phase 2 discovered high levels of chemicals at the playground that needed to be remediated. \n\nAlways good to get a different phase 1 company to double check the work of your prior adjacent report.", "replies": [{"id": "h25mgg5", "text": "Great point engaging multiple consultants. At the end of the day regarding your example, the extra cost on another report has a non material effect on the yield of a $100MM deal. Underwrite CRE for a living and you\u2019d be surprised how often third-party reports are filled with errors/missed details. It\u2019s actually even worse with appraisals with juiced values from aggressive assumptions (compressed cap rates, poor rent/sale comps, and unrealistic income/expense projections) and engineering reports ignoring material immediate and priority repairs. Third-Party\u2019s are a necessity (required when financing) and the consultants that produce them should always be critiqued to provide sufficient color to their findings", "replies": [], "depth": 2}, {"id": "h25o9hk", "text": "Applying appraisals to your MF example, we are in a point in the cycle where cap rates are compressing faster than NOIs are growing due to investor demand, and routinely see appraisals with a 30% premium over the appraised value 3-4 years ago with zero improvement of property-level operations (reducing expenses, rent growth, occupancy, capex programs, etc.), but instead being supported by bullshit cap rate comps to back into a value so an investor to can get to debt proceeds. Of course it gets funded 100% of the time so everyone can get paid", "replies": [{"id": "h25qymm", "text": "Some of the cap rate compression is due to the 10 year Treasury now being persistently below 2% and short term rates being back at 0%. Cheap variable rates are great for value add borrowers.\n\nCap rate comps will be hard to find when interest rates are at historic lows. Similar to how sales comps on new construction was hard to find when nothing was being built in depopulating markets for a couple years after 2009.\n\nThe other justification is that we are now on the rebound after Covid so there will be a return of rent growth that investors are underwriting in their IRR goals.", "replies": [{"id": "h26gv4c", "text": " Very true, albeit looks like we can now expect the 10 year to rise. I\u2019ve been wondering how some of the smaller investment shops are sourcing 150+ unit deals with the cap rate compression. The low hanging fruit for value-add deals is gone and you\u2019re now seeing many of those deals on their third iteration of value-add in this cycle trading at sub 4% caps in sun belt markets. The Blackstones and Starwood\u2019s of the world could care less since their investors are pension funds, insurance companies etc. looking to park cash, but how are the smaller shops raising capital for 4% annual yields? Is an honest question, because you\u2019re honestly better off buying into an apartment REIT at that yield and having the ability to pull your money out when you please", "replies": [{"id": "h26hfiq", "text": "My own answer to my question would be pivoting to investing in different parts of the capital stack, i.e., providing JV equity on new construction, assuming debt on poorly managed deals, etc. Definitely feel like creativity is a must in this market. Am all ears to how these deals are penciling", "replies": [{"id": "h27dpq1", "text": "What I've seen is a variety of strategies. Even pre-covid I knew JV equity that was partnering with developers to build apartments. They were also owning Hotels to hit their investment objectives.\n\nMy favorite strategy was seeing an investor buying up distressed and defaulted debt on hotels during Covid in tourist destination markets. That opportunity is gone now, but they probably are going to own a couple of really nice hotels at a major discount. \n\nFor value add apartments and house flips I'm seeing the less desirable areas and declining population markets becoming opportunities. These markets tend to lag the Country by 1-4 years in recoveries. As an example, Cleveland MSA has been depopulating, but finally is experiencing low vacancy and rent growth to justify broader value add renovations in more areas.\n\nRetail could be an opportunity with a decent amount of owners that went bankrupt and other centers that lost a couple of tenants. Retail is still over built and tenants lost market share to Amazon so the property to buy is on a case by case basis.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "h26iw44", "text": "To add to your comment on the COVID market- I\u2019m not sure where you\u2019re at, but the markets we are in saw record rent growth during the pandemic due to the slowing of new construction and rock bottom interest rates driving home prices out of most renters reach. The exact apartment unit I broke a lease at the end of 2019 was renting at $1100/month is now  $1500/month a year and a half later. Contrary to politicians narrative of everyone struggling to pay rent is the reality that collections on average were down about 2% in 2020 vs 2019 per the NMHC.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "h20ozi8", "text": "Environmental site assessment is the biggest, archeological site assessment, survey, services available, developable area, zoning and permitted uses, make sure there are no wetland or other habitat designations that reduce developable area.\n\nCongrats on your investment. As much as you have appetite for risk, environmental issues can go well beyond costs you could imagine. I've come across properties that had no prior development and seemed harmless but an ESA discovered a bunch of lead or chlorinated salts buried in them. \n\nNever skip environmental due diligence in industrial real estate. Once you own a contaminated property it's a liability that's difficult to resell unless it's remediated.", "replies": [], "depth": 1}, {"id": "h218n5g", "text": "People have already mentioned the Phase I and the necessity of it. \n\nI would talk to an architect and the city to triple check that your intended design works and what the fees are going to be. The biggest pain in the butt I hear from my developers is the unexpected development fees for sites to update traffic flow or utilities. \n\nAgain you may have the use as a right, but that does not mean there are other city or municipality factors that can be a hinderance.", "replies": [], "depth": 1}, {"id": "h26o3cp", "text": "Why trip over pennies on the way to dollars? Order the reports and know what you have. The fact it\u2019s been partially developed in the past is a risk not a strength. Why did they stop? What were they building? If you want to take out a loan to build anything on that property, you\u2019re going to need all of the third party reports anyway so why not order them? Even if you have no intentions to develop it, a potential buyer will 100% conduct that DD. If you have the money to front the cash for this land deal, what is 20k or so in consulting fees?", "replies": [], "depth": 1}, {"id": "h2gfade", "text": "While the phase 1 for your property discusses the area, it doesn't necessarily cover all of the prior uses of the property you are looking at acquiring now. I would recommend a phase 1 so you know for sure. You may also want to have a survey done so you know the actual layout and placement of the lot. Other issues would be to verify zone/planning in writing with the city/county and make sure they don't have anything on the docket to change the zoning of the property in the future. \"Right to use\" sounds great until the city changes their mind and says you can't. Definitely get the extended title coverage.", "replies": [], "depth": 1}, {"id": "h3ik2qi", "text": "I would check in with the city to make sure the parcel is not located in a specific plan/ general plan area that could preclude new industrial uses/ development (try to meet with the planning director to gauge their attitude regarding your plans for the site). Also check on dev fees. \n\nIn my market some municipalities are easy and welcome industrial users on industrial zoned land where others will fight you tooth and nail regardless of what the county zoning was before incorp or what is \"grandfathered in\" from a use perspective. \n\nPhase 1 (from a reputable vendor) for sure, if you want to sell it at some point all it takes is a shitty Phase 1 from a vendor who wants to do a Phase 2, boreings etc for the real money to cause you some real brain damage.\n\nI would get a survey done on dirt so you know what you have as far as actual acreage.", "replies": [], "depth": 1}]