Three Legal Roadblocks to Avoid in CRE Development

This post originally appeared on SimonCRE Insights Blog and is republished with permission. Find out how to syndicate your content with theBrokerList.

The commercial development process is complex and can take years to complete. During development, you should be made aware of the potential legal roadblocks that can delay or halt the development process and impact the project in a negative way. 

Let’s examine three potential roadblocks to prepare for and avoid during commercial real estate development. 

Environmental Site Assessments

Ordering an environmental site assessment helps to determine the background of the site and if further investigation is needed. ESAs explore the history of a site and help the developer uncover any potential liabilities and financial losses before it’s too late. If you are working with a lender, it’s possible they will require an environmental site assessment before approving your loan. An environmental site assessment is segmented into two phases. Phase I investigates historical and public records to see what the site was previously used for. Officials will look for any evidence of contamination to determine if further investigation is needed. Phase II takes samples of soil and water to determine if there is any evidence of site contamination and possible liabilities. A Phase II assessment isn’t always necessary, depending on the findings in Phase I. Without an ESA, developers, lenders, and business owners take a huge financial risk that could end up costing them in the end. The federal Comprehensive Environmental Response Compensation and Liability Act (CERCLA) says the property owner is responsible for any contamination found on a property, which is why buyers who are serious about acquiring a property should absolutely get an environmental site assessment. ESAs are not a shortcut to proper due diligence but when utilized properly can help to avoid costly mistakes. It’s better to be overly cautious when it comes to uncovering potential site issues, especially when you plan on keeping the property for a long time. 

Zoning Codes, Restrictions, & Land Use

Zoning codes dictate the types of activity allowed on a property by segmenting land into zones. Conducting proper due diligence will help you avoid most zoning violations; however, when rushing into development, the probability of unforeseen zoning complications becomes more of a reality. Some of the most important zoning codes to consider are floor area ratio (FAR), lot coverage, parking ratio, setbacks, and fire escapes. FAR compares the square footage of a land parcel with the building. Lot coverage compares square footage of a land parcel with the size of the building’s footprint. Parking ratio compares the number of parking spaces to the property’s gross leasable area and must comply with current Americans with Disabilities Act regulations. Fire escape codes may vary depending on the height of a commercial building and typically take the longest to account for compared to other zoning codes. Be sure to review both functional and aesthetic-related zoning codes. The purpose of zoning codes is to keep buildings from becoming too crowded together and streets from narrowing. If zoning codes are keeping you from developing a property, you may want to consider obtaining a variance. This can be an effective solution if you can convince the city and local communities there is a need for your property development. Careful planning and review of land use will save your development project from serious financial damage and civil penalties. 

Title Defects

After finding a location for your commercial business, you are now ready to acquire the property. A title search will need to be done prior to purchase. The state of title will show the documents associated with the property in the past, such as mortgages, easements, liens, employment, and civil records. A title defect can occur when an error is related to the ownership of the property. Defects in titles can impact your ability to purchase and resell the property and banks can refuse to provide financing. A few examples of title defects are liens and incorrect information. Land records can reveal information about present liens on a property. Tax liens mean the owner may not have paid property taxes prior to selling the property. Judgment liens indicate that a creditor won a lawsuit against the property. Mortgage liens are considered the most common lien, and the property could be foreclosed on by the bank if not resolved before new ownership is transferred. As mentioned, incorrect property records could result in a title defect. Hiring a real estate attorney is highly recommended to protect the buyer from these types of errors. Getting title insurance can protect a buyer from fraud and forgery. A good policy can also expand to dispute over boundary loss coverage. Defective titles can cause financial complications and even result in the loss of a property. Conducting a thorough investigation into a title will save you headaches down the road and help ensure your investment.

Being informed on the potential roadblocks that can delay the development of a commercial real estate property can help one better prepare to navigate any difficult situation. Conducting thorough due diligence will ensure smooth sailing in commercial development.