I was trading e-mails the other day with a general contractor friend of mine, Mark Stevens of Stevens Construction, Inc., and he took the words right out of my mouth:
I wish these prospective buyers would do some more due diligence before buying these ‘bargain’ existing buildings.”
We had been discussing new projects, and I was explaining to him that my zoning and land use law caseload has transitioned from focusing on new development and obtaining development entitlements to assisting owners (sometimes involuntary bank-owners) with code violations or development permit-related problems with their property. As a contractor who does a large amount of medical office construction, Mark was lamenting that he is seeing more buyers jumping on fantastic real estate bargains and purchasing existing distressed commercial and office buildings without diligently investigating whether the building may be used for the desired purpose.
Buyers often think that because an existing building was previously used for medical offices or some other use, they may buy and remodel it for that same use. Unfortunately, they sometimes find out much too late that the previous use was a “grandfathered” or nonconforming use, and the new and improved use the buyer desires to put in is no longer allowed or is severely restricted due to a lack of parking or on-site open space. Sometimes the local codes have changed and require more square footage for a certain use or prohibit the use entirely. Often a solution might be to seek a variance and reduce the required number of parking spaces or seek a development approval to add more spaces, but it can be tough to convince the local government to approve this remedy when the buyer essentially created the very hardship he is seeking relief from.
In the height of the real estate boom, I often assisted clients by providing a due diligence analysis regarding the existing entitlements or development potential, and they were happy to have me do it because it added value to projects, or provided a red flag to abandon the deal. As the market peaked and then careened over a cliff, due diligence investigation has sometimes been overlooked or relegated to those who may not be aware of the latest changes to a local government’s land development code or comprehensive plan. Even worse, sometimes there is no actual change in the wording of a code, and it is the interpretation of the code that changes. Skipping a proper due diligence investigation is a huge risk for a buyer, and while it may add a few thousand dollars to a project’s bottom line, denial of the desired use or a lengthy variance or special exception approval process can kill a project altogether.