Environmental Surveys as a Pre-Marketing Requirement #CRE #Industrial #phase1

As an industrial real estate broker for over 12 years, I have learned a few key tasks every seller of industrial real estate should undertake prior to marketing their property.  Near the top of the list is having a qualified environmental consultant complete an environmental site assessment, commonly referred to as a Phase I.  The reasons are numerous but the biggies are:

  • Reveals seller’s potential environmental exposure, if any, prior to identifying a buyer.  A seller can deal with any potential environmental concerns prior to entering into an escrow, avoiding potentially costly delays and escrow terminations.
  • Gives the seller control of the environmental review process from the beginning of marketing its property.  In most transactions, the first recent environmental review of a property being sold will be when the buyer’s consultant conducts an environmental site assessment while in escrow.  In this scenario, the buyer, not the seller, has control of the process and the seller will be in a reactionary position to whatever concerns or recommendations are made by the buyer’s consultant.
  • Makes the property more marketable and can lead to a higher sale prices in a shorter amount of time.  Perhaps nothing turns away potential buyer faster than an environmental concern.  A recent environmental site assessment showing no recommendations for further inquiry can put buyers at ease that they most likely will not encounter an environmental issue in their own investigations, saving them time and money.  In some instances, an all-cash buyer may accept the seller’s environmental site assessment and therefore save the cost of conducting one themselves.

This list can also apply to a landlord as well.  In fact, many Fortune 500 companies now require a recent environmental site assessment be performed prior to executing a lease.

Seller’s may take issue with the cost of conducting an environmental site assessment or its necessity since the buyer or its bank will often conduct one anyway.  However, in my opinion this viewpoint often does not consider the points above.  Unless the seller has conducted a recent environmental site assessment, it should always consider the performance of an environmental site assessment of their property before marketing to be a worthwhile investment and in the seller’s interest.

On Leases

A client, who is a large private landlord, and I were discussing one of his tenants recently who was singing the blues about their lease and how they did not think it was fair that the landlord was enforcing certain provisions of the lease because “they had not read it”.  You would think that this is rare.  After all, it is hard to imagine something more dangerous for a business than not examining the contracts to which they are a party.  In my experience, however, this is not a unprecedented occurrence.  Business leaders whose firms lease space (tenants) seemingly have less and less time to understand a lease’s impact on their business.  Even if tenant’s hire a real estate representative and attorney to negotiate the lease, they still can be surprised by a problem during the lease term.  Yet, tenants can mitigate their risk for surprises by following a few best practices which are essential for avoiding most problems down the road.

First, tenants should fully understand their intended use in the building, both at the time their lease is negotiated and during the lease term, and make sure their present and future use is allowable under the lease and any other entitlement (i.e. zoning, code, CC&Rs, etc.).  In addition, tenants should confirm that the amenities within the premises are sufficient for its operations.  There are horror stories of industrial tenants signing long-term leases only to find out the sprinkler system required for their product is insufficient and will substantial capital to upgrade.  Problems such as these can cause significant and, sometimes, terminal disruptions to an operation.  The key is for tenants to properly convey their present and intended use to their real estate representative and attorney, and be certain their use is amenable in all respects.

Second, tenants should understand their obligations under a lease.  Leases are typically unique, and just because a lease is referred to as a net, triple net, gross, full service gross, percentage or other lease type does not mean that the actual tenant obligations in the lease will be consistent with the aforementioned descriptions.  Of particular concern are maintenance provisions, i.e. who takes care of what and when, and when rent is due and considered late.  Tenants should review all of their obligations under a lease with their real estate representative and attorney prior to signing the lease.

Third, tenants should review their leases periodically over the lease term.  Things change and even the most thorough lease at signing can be in need of amendment after a few years to reflect changes in a tenant’s business or other external factors.  Also, tenants should consider a lease audit or review of its financial obligations under its lease(s) to determine if it has overpaid for any charges levied by the landlord.

Finally, tenants should hire a qualified real estate representative and attorney to negotiate business and legal terms with the landlord and serve as a resource throughout the term of the lease.  Both can serve as insurance against entering into a lease that will prove problematic in the future.  In addition, tenants should look for a real estate representative and attorney who will be a resource in the future and, if possible, help focus the tenant’s attention on future lease obligations when necessary.