Industrial Warehouse Sales Transaction Due Diligence

[Kris P.]

Hi Everyone, 

I just have a quick question - we are planning on purchasing a warehouse for our company in Los Angeles. When making an offer on the property I have advised the broker to require the seller for the following reports : 1. NHD, Environmental Report Phase One , Pest Report, Termite Clearance ,CLUE Report, Surveying. The broker came back and advised that since its a sellers market we should only ask for the NHD report and the seller had done the environmental report few years back he wont want to pay for it again. We should pay for all the other reports if we want them but he has never seen someone in his past experience conduct a surveying for a warehouse - (The warehouse is connected to many other warehouse building around the area and does not have a clear boundary line - but the seller is providing for the plans)

Does anyone have any past experience or recommendation on what type of reports are needed (must) and advice for anything else?

Thanks! 

[Scott Patterson]

Hi Kris, 

I am a broker from Los Angeles and I specialize in industrial properties. Sure it is a seller's market but this does not mean you skimp on any reporting you feel necessary. If I was representing a buyer and the seller balked at any reports, I would assume they were hiding something. 

I would NEVER advise a buyer to purchase an industrial property in California without a Phase I report. Remediation for any issues on a Phase I can quickly escalate upwards of $100k if there is contamination in the ground soil on the property. Additionally, if you are financing through a bank, they will always want to see a clean Phase I within the last 18 months or so. If the seller got the Phase I within the last couple years and the use of the property has not changed, you can roll the dice and assume it is still clean. 

As for the termite report, I would not be overly concerned unless you have reason to worry. I have walked in to warehouses where there was a pile of sawdust on the ground and it was raining down from the beams above. Obviously a red flag and would want to get a termite report in this case.

Your broker is correct about surveying. It is not necessary. 

Another thing that I always advise my buyers to be aware of is the condition of the roof. Roofs in Los Angeles seem to have about a 20 year lifespan before a $4-$5 per square foot replacement needs to occur. Depending on where in Los Angeles you are looking, roofs have different tendencies. San Fernando Valley gets very hot during the summer and then relatively cold during winter and even some summer nights. This causes expanding and contracting that has been a problem for some owners with the recent rains. All you would have to do is ask the seller about the condition of the roof. Ask about the last time they had it sealed or replaced. 

Given the current industrial market in Los Angeles, buyers be cautious. Many sub-markets are working with sub 1% vacancy which means if a building is on the market, there is probably a reason it hasn't sold. 

Best of luck to you and your company Kris! Buying can be a great option, especially with current SBA financing. I look forward to hearing how it all shakes out for you!

Scott