Building From the Ground Up
By Kevin D. Ringwelski
With real estate development again on the rise, developers are as interested as ever in potential properties across northern Michigan. While the upswing in development is good news in many ways, jumping into a new project without the proper due diligence measures can spell trouble quickly, turning a profitable opportunity into a financial nightmare. An ounce of upfront due diligence investigation will save pounds of curing after acquisition of a problem property.
Once aware of what is underneath, a developer can further consider what can be built from the ground up, thus three key steps should be completed as part of any commercial development consideration: environmental due diligence, land survey and geotechnical exploration.
Environmental due diligence involves the completion of an environmental site assessment (ESA). Why? The purpose of any environmental assessment is twofold: ensure that the purchaser knows the true value of the property, and expose any soil or groundwater contamination from historic use or neighboring sites that may impact the property’s value or, worse, cause civil liability. Discovering any issues upfront will factor into developmental potential and prevent possible problem acquisitions.
ESAs generally come in three levels: Phase I ESAs, Phase II ESAs and Baseline Environmental Assessments (BEA). A Phase I Environmental Site Assessment (ESA) involves inspecting the property and collecting historical and current information to evaluate the potential for environmental contamination. If the Phase I ESA concludes that no potential for contamination exists, then no further investigation is required. However, if there is potential contamination of the site by hazardous materials, a Phase II ESA should be conducted. This would include collection of soil and/or groundwater samples for laboratory analysis to confirm the presence of hazardous materials.
If a site is determined to be contaminated prior to purchase, the information resulting from the ESAs can be used to limit the purchaser’s environmental liabilities. The information can also be used in the purchase agreement by requiring the landowner to clean up the property or reduce the purchase price to offset the cost to remediate the site. Alternately, the purchaser could acquire the property and limit his liability for existing contamination by submitting a Baseline Environmental Assessment (BEA) to the Michigan Department of Environmental Quality (MDEQ).
A BEA is a detailed document that is submitted to the MDEQ, demonstrating that the property was contaminated before a specific party became the owner or operator. The BEA is only applicable to a specific owner or operator and a specific site that qualifies as a “facility” due to the levels of hazardous materials exceeding MDEQ criteria. Although separate from the ESA, the BEA is prepared using the information obtained during the Phase I or II assessment.
Once the environmental due diligence is complete, an ALTA survey should be completed to verify the dimensions and location of the property. Completed under the American Land Title Association (ALTA) standards, an ALTA survey is acceptable by all parties, including title insurance companies and lending institutions, eliminating the need for multiple surveys and escalated fees.
An ALTA survey should be completed for every commercial or industrial transaction. Why? In addition to disclosing the physical characteristics of the property being purchased, as well as topography, utilities and zoning information for the consideration of future development, ALTA surveys also show any improvements, right-of-ways, and any easements granted by previous property owners. For potential development sites, this is critical. For example, if an easement granted to the power company goes straight through the middle of a property it may be difficult, or impossible, to develop.
ALTA surveys also go hand-in-hand with title insurance. A current commitment of title insurance is needed to complete an ALTA survey because it supplies the initial description of the property. The title company will then need the completed ALTA survey to finalize the transaction. When a land title company provides title insurance, it guarantees the purchaser that there are no unknown encumbrances on the property. The ALTA survey is used to verify this claim.
Following the successful environmental assessment and acceptable ALTA survey, the last step of due diligence is a geotechnical exploration. A geotechnical exploration includes a subsurface investigation to identify soil conditions; determine the capacity of the soils to support proposed buildings or structures; and, to recommend appropriate foundation alternatives.
By completing a soils and foundation investigation as part of the due diligence, any soil stability issues are exposed and can be addressed prior to purchasing the development property.
Kevin Ringwelski, PG, CPG, is the Director of Environmental and Drilling Services at Gosling Czubak in Traverse City. With more than 25 years of environmental consulting experience, Ringwelski has performed hundreds of environmental site assessments for municipal, commercial, industrial and private clients throughout Michigan.