Due Diligence Missteps Can Cost Building Owners Plenty

NEW YORK CITY-Area building owners aren’t being diligent about due diligence. That, at least, is the opinion of environmental attorney Lawrence P. Schnapf, founder of locally based Schnapf & Associates. He tells GlobeSt.com that marketplace pressures and changes in liability laws have encouraged a certain degree of corner-cutting on the part of property sellers and buyers alike. The result can be remediation charges ranging from $25,000 to $250,000–and that’s a must for underground tank cleanup, he notes. But the lawyer also tracks an increase in other areas of liability, including personal injury, property value and stigma claims.

Owners must take a more thorough approach to site inspections, data base searches and record reviews before they sign on the bottom line, the attorney recommends. And he notes that there are common problems and some quick fixes to ensure quality due-diligence.

“Beware of commodity style reports,” he urges. “These are just desktop reviews of records and cursory inspections of premises.” According to a state report, 70% of these reports fail to uncover site contamination, he adds.

Schnapf also recommends that owners not be overly reliant on “representations and warranties in contracts. These are only the starting point.”

Which brings up the question of time. The attorney states that real estate executives don’t allow enough time for a proper review, which should be completed before terms and conditions are locked in stone. “Give at least a month to do the phase-one inspection,” he says, “and the earlier in the process, the better.”

It’s also essential that a review of past building uses be completed, and that includes a talk with local officials. He sights a case in which a building was the former home of a local police firing range. It had lead-hazard issues, and yet the former use appeared in no documentation.

If you’re buying a business, Schnapf warns to look into other facilities and businesses the target firm may have owned or operated in the past and “how they’ve allocated liabilities. You may find yourself at risk.” He also says that former businesses might have been waste producers. If so, the disposal of those wastes will be key to your negotiations.Buyers and sellers should also be wary of audits older than six months and equally suspicious of the other party’s estimates of liabilities.

“Costs for a good due-diligence vary based on the size and type of asset,” he reports, “but they should range between $3,000 and $5,000. Compared with the downstream problems that corner cutting could produce, he states that it’s well worth the time and money.