Using due diligence on real estate deals to avoid paying in spades

Buying a building requires more than a walk-through and a superficial kicking of tires. For property and development lawyers, this means creating standardized property condition reports whenever their clients go shopping for new digs, according to two members of Schwetye Architects Inc., who spoke to Bar Association of Metropolitan St. Louis attorneys looking to protect their clients from real estate lemons.

Thomas R. Schwetye, AIA, principal-in-charge of Schwetye, and Matthew J. Forman, RA, project manager at Schwetye, spoke of the wide variety of tools available to attorneys at their seminar titled Standardized Property Condition Reports: A New Due Diligence Tool for Real Estate Transactions on Feb. 15.

There are really four occasions when a property condition assessment is appropriate: when you're buying a building to use basically as is, when you are buying a building to renovate and then use, when you are closing out a lease at the end of a long-term lease and when you are resolving a dispute or when there is litigation, explained Schwetye.

Forman added that many times, prospective owners in the past had attempted to walk through a property, take a look at it and think the paint looks good, the carpet looks pretty new and decide it's a good buy without fully understanding the hidden, unforeseen problems that lie ahead.

Attorneys working with developers and owners need to enlighten their clients as to the many ways to spot problems in advance to make the best informed decision possible before inking a deal.

We take consultants with us, said Forman. As professionals and architects, we go in, we know the buildings, we know what we're looking for, we know the implications of a lot of different things. One of the reasons we start doing these is we got tired of telling building owners after they already bought the building the problems with their building after they've already signed on the dotted line.

There are things people just can't take for granted, he added, even if it's a good property that has a good background to it and has been well maintained.

Some of the professionals recommended by both men to assist attorneys and their clients be fully cognizant of potential problems include surveyors to check property boundaries, environmental engineers, roofing consultants, mechanical engineers, fire protection engineers and general architectural consultants. These professionals know what to look for that the buyer may overlook.

An example of a sometimes hidden problem came from a building Forman inspected, where the baseboards of the basement had been peeled off and there were one-inch diameter holes all around the perimeter of the west side of the basement.

That's an indication that at some point in the recent past, that basement has flooded. There had been water in there, he recalled. The contractor stripped the baseboard off and punched holes in the walls to make sure the water drained out of the walls and everything dried out. . . . Was it a one-time thing? How long did the carpet stay down? Do you have mold growing in the walls?

Finding clues such as the holes can amount to big cost implications that can save your client money in the long run, emphasized Forman.

I hope we got the point across that we don't like surprises because surprises cost money, so if we can avoid that up front, that's what we intend to do with those types of inspections. . . . The big stories here are the code conformants, the fullest use and the cost implications, reiterated Schwetye. Understand what is being sold to the owner, which helps identify and quantify what the implications are.

Hiring specialists saves buyers from regional regulation surprises as well, said Forman, citing Creve Coeur as a major example of possible localized snags when purchasing a property. Creve Coeur has written into the building code that owners are required to spend up to 10 percent of the project's budget on any renovation work updating the whole accessible path in accordance with the Americans with Disability Act. This covers everything from the parking lot all the way through the building, including elevators and rest rooms.

So if you think you're going to go in and put in new carpet and put in paint for $60,000, they're going to force you to spend $6,000 on your parking lot, your elevators, your doors, illustrated Forman. It's mandated.

But due diligence is not limited to buyers alone, cautioned Schwetye, but includes businesses looking to lease a space. Attorneys must not only examine the lease's wording, they must also take professionals to the site to point out repair costs for which the tenant would be responsible. Forman noted that in one instance, he compared the terms of the lease to the physical condition of the property and found the deal was not so sweet.

It became evident very quickly that the terms of the lease about the condition of the roof and the maintenance of the building were going to make it completely out of the ballpark cost-wise for this person to rent this space, he said. He would have been on the hook for tens of thousands of dollars in roof repairs for his part of this retail shopping center. They ended up walking away from the lease because of the maintenance issues that were brought up in the lease language, compared to the condition of the rest of the building.