Lesson Tag: OZ110FL-BR

Video Time: 4 Minutes

When considering pre-acquisition property due diligence, many savvy investors request the “Big Four”: Phase I Environmental Site Assessment (ESA), Property Condition Assessment (PCA), ALTA Survey, and Zoning Compliance Report.  However, multiple complimentary services are available to help an investor, property owner and/or lender assess potential risk. Depending on the unique features of the property, as well as the buyer’s anticipated use of the property, the Big Four core services may be supplemented with additional evaluations. 

Some of these additional assessments will be driven by the location of the property. For example, properties located in seismically active areas, such as those on the west coast of the United States, may warrant a seismic risk assessment. For areas of high potential radon concentration, a radon survey would be beneficial. Properties that do not have a connection to public water and sewer services may require a drinking water evaluation to screen for lead in drinking water, as well as a septic assessment. 

For properties where extensive renovations and/or demolition is planned, a hazardous materials building survey that evaluates the potential for asbestos containing materials, lead based paint, PCBs in caulk, mercury containing devices, and other materials that would require special handling and disposal would be informative. Similarly, for properties where potential development is intended, a wetlands and flood plain evaluation should be considered. An environmental lien search to identify Activity and Use Limitations (AUL) and land use restrictions can also yield valuable information pertaining to the property and potential development challenges. 

Acquisitions during the coronavirus pandemic may warrant additional assessments as well. At the onset of the pandemic, many buildings were unexpectedly vacated for what was initially understood to be a short period of time but remained vacant for several months. If your target acquisition has been vacant for a prolonged period, consider an industrial hygiene evaluation to ensure that there are no leaking emergency generators or aboveground storage tanks, mold growth due to unbalanced HVAC and/or pipe leaks, or legionella blooms in water chillers. Solutions can be employed to swiftly and cost effectively address these conditions. As we proceed through the economic impacts of the global pandemic, there may be an increase in foreclosure activity. It may be prudent to conduct a regulatory compliance review pre-foreclosure. Should larger environmental issues be identified, a remedial cost estimate and remedial action plan will be developed. 

For a potential property owner who wants to ensure appropriate conditions for future occupants and/or tenants, an Indoor Air Quality (IAQ) evaluation can be illustrative. Currently, there is an increased focus on industrial hygiene in commercial properties, primarily driven in response to COVID-19. Many commercial spaces are undergoing deep cleaning. Property owners may want to perform an IH cleaning evaluation on a regular schedule to provide confidence to their occupants. 

With so many factors involved, developing a due diligence strategy requires thorough understanding of what tools are available and when to deploy them. You may find it helpful to use a due diligence checklist. Work with your due diligence consultant to develop a risk mitigation protocol that incorporates your business objectives and your level of risk tolerance, as well as the specific attributes of your target acquisition. 

Video Time: 2 Minutes

• How to choose sites for optimal business objectives. 
• Once you have targeted some qualified Opportunity Zones for real estate development, your first objective is to evaluate how and if that parcel can accommodate your business objectives and potential building use. 
• How to manage environmental and physical building risk. 
• The U.S. Environmental Protection Agency recently targeted 149 communities to receive $64.6 million in funding for brownfield cleanup, almost three-fourths of which were Qualified Opportunity Zones. 
• How to manage project completion and budget. 
• The degree of success when investing in opportunity zones will depend on optimization of site selection for use and occupancy, understanding and pricing in all environmental and physical risks associated with the site, and ensuring timely construction progress and budget. 

• Capital that is funneled into Qualified Opportunity Funds can also provide ample opportunity for cultivating human capital for redeveloping inner-city and lower-income neighborhoods. 
• Bringing talented minorities into commercial real estate deals can help boost understanding of local markets and business practices. 
• Gentrification is a concern when pouring billions of capital gains into lower-income and economically disadvantaged areas.  
• The highest number of gentrified opportunity zones are located in Rust belt metros, including Baltimore, Chicago, Detroit, Philadelphia and St. Louis. 
• Opportunity zones in tech hubs and hotspots are experiencing high rates of gentrification.  
• Many of the least-gentrified O-Zones are in Sun Belt cities.  
• Of the top 100 most gentrified Opportunity Zones, 75 are within urban areas. 

• Much of the coverage of Qualified Opportunity Funds has focused on tangible investments like development and/or renovations of commercial real estate. However, little has been discussed about the QOF sub-fund.  
• A QOF might choose to invest in a sub-fund which, in turn, funnels money into Qualified Opportunity Zone (QOZ) property. 
• There are several ways to protect yourself when investing in QOFs and sub-funds. 
• Due diligence is required for any investment; this is especially the case for QOF and sub-fund investments. 
• QOFs and sub-funds must pass an asset test every six months. Additionally, QOZ properties in which a QOF/sub-fund invests are required to be “substantially improved” within 30 months. 

The concept of Opportunity Zones was hatched in early 2017 by Sens. Tim Scott (R-SC) and Cory Booker (D-NJ) as a way to propel economic development in what the Internal Revenue Service calls “distressed areas.” Congress approved the legislation as part of the tax-reform bill last December. That was appropriate, since the investments in Opportunity Zones are “really tax-driven,” said Matt Ertman, a partner with the Allen Matkins law firm, which is working with several clients on Opportunity Zone issues. 

Opportunity Zone investments are primarily a way for investors to defer capital gains taxes for a period of time.