The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
Due diligence when it comes to industrial real estate involves a few different factors. Having an environmental study done on the property is critical, you’ll want to speak with the current tenants of the property, and you’ll want to inspect every space on the property individually. After reviewing these aspects, also looking over expense history of the property can lead to some important insights about the building’s potential issues or operating expenses.
Richard Wilson: Are there any unique due diligence insights when it comes to industrial real estate that you could share with us?
Robert Borris: There are a few. One is you really need to do an environmental study. If the seller doesn’t have one – you can’t finance a building today without an environmental study, it’s called a phase one environmental study. And if the seller doesn’t have one, you ought to ask the question “Well, why?” But if they don’t, you have to have one done. And number two, if they have one, what you can easily do is go to back to the same engineering firm that did the study, and it’s called a bring to date, and they’ll take the study they already did and just research it, it’s a pretty simple process really it’s just a study, not a site study, just a study of what’s happened in the area and is there anything that could have happened to change the environmental condition.
Richard: Right.
Robert: I’ve always known in advance, frankly, it would need to – phase one would indicate it needs a phase two. Phase two means they’re going to go in and dig around in the dirt and look for bad stuff, I’d keep away from that unless you know what you’re getting into when you do that. So that’s, environmental is really really important and they can be very expensive to fix environmental problems. Not that you shouldn’t do it, but if you do it you’ve got to know what you’re doing really.
Richard: Right.
Robert: Other thing is talk to all the tenants in the building. You should have somebody either you or somebody working for you or with you to do this. Talk to all the tenants in the building, you might be surprised at what you might find. I bought a building years ago where, Big tenant, I don’t know 600,000 square foot tenant, we bought the building because the tenant was moving out and we talked to the tenant and the tenant says “Yeah, we’re moving out but we don’t want to move out. We want to renew, but we couldn’t get the landlord to talk to us.” Okay, well, let’s renew the lease. That’s instant value, that’s instant value add.
Richard: Yeah, right.
Robert: The third one is really kind of inspect the building, inspect the spaces. I’ve seen buildings where there is a tenant in the tenant roster and you walk into the space and there’s nobody there, I’ve seen that. I’ve seen a tenant who was there but wasn’t doing any business, you know that’s not good. You never know what you might find if you don’t talk to all the tenants and inspect all the spaces. It’s a hands on, definitely a hands on boots on the ground kind of activity.
Richard: Sure.
Robert: And the last thing I would do is, it’s really critical, is I would review expenses. And it’s easy to do meaning because what you’re looking for is anomalies. If there are legal expenses in the expenses relative to operating the building or engineering expenses, does that mean there’s a problem that they’re looking into that they decided not to address? Now it’s the exceptions to the rules that you want to know. Not the rules itself, you know, they’re pretty consistent. And when you have the building inspected, does the building meet current ADA and environmental rules because those change and those can be expensive to fix under certain circumstances.
Richard: Right, right. Makes sense.
