Real Estate Forum - April 2013

NEWS FRONT
Grow-Your-Own Due Diligence

BOSTON—Not all communities around the country worry about a possible multifamily overbuild. In fact, Boston Mayor Thomas Menino has just called for 30,000 new housing units to go up in his city by 2020.

Given the push, and the expectation that national development is on the verge of picking up in virtually all CRE sectors, Tom Guidi is concerned. Guidi, senior real estate partner at locally based law firm Hemenway & Barnes, thinks investors, especially first-timers, need to keep certain due-diligence basics in mind.

Actually, given the leap-before-you-look mentality that pervaded the CRE market in the run-up to the Great Downturn, even seasoned pros might be well-served to heed the lawyer’s advice. Based on what he is seeing cross his desk, “there is a frenzy of projects,” Guidi notes.

That need prompted the law firm to produce a white paper on the subject, in which Guidi notes that, “Following a developer’s lead through negotiations can be tempting. However, investors must be certain they know what to ask for when structuring a deal to ensure a balanced transaction.” With that in mind, Real Estate Forum asked Guidi to give us his five basic rules of due diligence.

1) Real Estate Is Still Location. “Investors need to know if the property is in a good location,” Guidi says. But location is more than address. What other developments are happening locally and what do they mean for the area’s potential growth and your potential competition? What are the area’s demographic trends?

2) It’s About Time. Guidi says potential
investors need to know where we are in any
economic cycle and project where we’ll be
when the project wraps. “You don’t want to
be the last one into an area that is filled out
with projects,” he says.

Too Much Water, or Not Enough?

Floods and droughts—they’re part of biblical lore. In our history, there have been various hurricanes, the Johnstown flood and the Depression era Dust Bowl. The Mississippi from time to time overflows its banks and Atlanta’s reservoir system almost ran dry in 2007.

More recently on the storm side, we’ve had Katrina (2005), Irene (2011) and, of course, Sandy (last October). On the dry side, varieties or if you get ripped off at one of those airport concessions. Most home and business water bills are a pittance compared to other utility charges.

But we need to take water more seriously. If you live in the Southwest, the Mountain West or Southern California, coping with chronic water shortages may become a fact of life. Agricultural interests fight urban areas for precious water rights and various towns and counties battle each other over supplies.

Many places give up on swimming pools in backyards and replace lawns with rock gardens. Golf courses around Phoenix use re-circulated gray water to maintain fairways and greens, while new homes in many areas include cisterns and separate plumbing for drinking water and re-useable waste water. Jurisdictions will confront more situations where they must throttle development in the face of inadequate water supplies to sustain future population.

By Jonathan D. Miller

Water bill charges escalate in many older cities like New York, which has ample watershed and some of the best tasting water anywhere, but needs to spend tens of billions of dollars on a new water tunnel and replacing or repairing near ancient underground mains and pipes. Washington DC, Philadelphia and Chicago are other notable examples of cities dealing with big ticket water system makeovers to stem leaks and avoid systemic failures from water main breaks.

Sandy, Irene and Katrina impacted different parts of the country, but sent warning signals about the huge costs of water-related storm damage to the nation’s coastlines and vulnerable riverside towns. Rising sea levels (believe it Senator Inhofe, it’s happening) require major cities along the Atlantic and Gulf coasts—Boston, New York, Miami, New Orleans and Houston—to rethink strategies to protect against significant future damage. I don’t know many people who rule out some version of Sandy occurring again sooner than we’d prefer. However, that hasn’t stopped federal storm relief dollars for rebuilding areas which will be wiped out again if a similar storm strikes as expected.

Many suburbs also must evaluate how to deal with increased storm water runoff—untamed development and paved over watershed leaves inadequate natural protections for absorbing heavy rains and snow melt. The runoff also carries various poisons from car lubricants and engine leaks to garden pesticides and herbicides into reservoirs and eventually aquifers used for drinking water.

When it rains, it pours.

(A longer version of this column appeared on GlobeSt.com.)

Jonathan D. Miller is a partner in New York City-based Miller Ryan LLC. He may be contacted at jonathan@millerryanllc.com. The views expressed here are the author’s own.