Spring 2009 • Issue 32, page 11

What Must You Do When Taking Over Vacant and Unfinished Construction Projects

By Peters, Rick*

In this declining economy receivers and other asset managers used to dealing with real estate only on paper are suddenly finding themselves elbow-deep in dirt.

As each new distressed property falls into inexperienced hands, the collective learning curve for properly managing such assets to preserve value gets only steeper. Physical site characteristics, risks and liabilities, entitlements, maintenance and code-compliance issues demand immediate attention.

Don’t be overwhelmed! Get a grip on your new responsibilities by (a) taking nothing for granted and (b) following a checklist to help identify potential problems you might encounter (and become familiar with some basic remedies).

Basic property condition. Inspect and define the actual state of construction, both horizontal and vertical. Problems evident in horizontal construction – such as utility lines, streets, curbs and gutters – need to be caught and dealt with quickly and effectively. The potential expense of these fixes is much greater than those for vertical construction issues.

For instance, settling and cracking in streets can mean sub-grade soil compaction wasn’t done properly – a problem that can’t be fixed by adding more asphalt. Even enclosed properties – such as dormant shopping malls – have problems like water-line leaks in one space migrating into others, causing damage. Many problems may also lurk out of sight in vacant big-box stores. This is why an early thorough inspection of all roofs and drainage systems is a must.

Boundaries. Learn the status of the property’s precise boundaries — every property line, all easements, and actual or potential disputes with neighbors. Encroachment by neighboring developments may be an issue, especially in properties that have been vacant or stalled for a long time.

Up-to-date building documents. Acquire approved plans and inspection documents to confirm their status and validity. Outgoing builders and project managers have no interest in the property anymore – and may have supplied you with erroneous site plans. Go to the local government jurisdiction and double check. Make sure everything is consistent with plans the builder has in the field. If you don’t find the problem now, you can be sure a future potential buyer will.

Proper execution of plans. Find, read and fully understand the city / county conditions of approval. Did the builder of record properly adhere to city / county requirements? Has he put the parkway in as approved, or the tot lot?

Permit and fee compliance. Meet with local government to determine the status of fees paid, inspection compliance and general product quality. You may find that the status of the product in the field conflicts with city or county inspection records, and that permits have expired. If so, re-inspections must be done to confirm that field status coincides with the county’s inspection records if construction is to proceed. Apparent inconsistencies may require the removal of interior drywall or exterior wall coverings to confirm that installations and workmanship comply with the approved plans.

Weather mitigation. It’s important to understand how the weather affects properties with unfinished exterior surfaces or interior drywall. Weathering / deterioration can become the largest cost component for owners. A receiver must weigh this risk when considering whether to incur the expense of wrapping a wood-framed structure with an exterior weather-barrier to avoid/end deterioration.

Safety issues. A fiduciary must quickly deal with elements of the property that pose a health or safety risk to the general public. A poorly percolating retention pond may be breeding mosquitoes or insects and pose a safety hazard for children.

Hazardous materials. Immediately check to see if toxins or unhealthy materials are properly stored or protected? Partially built projects are often littered with old cans of paint or stains, buckets of roof tar, motor oil from construction vehicles and other potential soil contaminants. Such materials must be immediately cleaned up and shipped to an approved dump by a certified company.

Payables in arrears. Nail down the status of payables to contractors, suppliers and consultants. Payables in arrears may quickly reach hundreds of thousands of dollars on larger projects, as credit tightened and construction draws were denied. The asset manager or trustee must understand this problem up front since it drains value from the property asset.

Title search. Conducting a thorough title search is absolutely essential. Chances are you will find a buried glitch – like a trade contractor who had a personal dispute with the previous construction supervisor and filed a lien against the property out of spite. Unless known, these problems will come back and haunt you, derailing sale closings even with a cash buyer.

Parcel numbers. Closely review assessor parcel numbers. Make sure tract numbers, lot numbers and addresses at county offices are consistent with building cards and legal data in the field file. Mistakes happen and cause big problems later.

Common areas. In “homeowner-association” developments with common areas, a complete review of all documents dealing with the project’s phasing, lettered lots, pledged amenities, etc. to make sure everything is accurate and in compliance with state regulations must be done.

Security. Resources permitting, include active security measures to protect your asset’s condition, especially if near a high-crime area. A live guard or surveillance camera system may be needed. Meet with local law enforcement to make them aware of key areas of vulnerability. Chances are they’ll appreciate the information.

Lighting. Provide for night-lighted areas within your property. Utilities have been shut off and meters pulled in many dormant properties. Work with the local utility provider to reactivate power to temporary lighting poles where needed. These can be installed inexpensively with minimal bills. Local law enforcement agencies will benefit from this effort.

Signage. Add signs clearly stating the local penal codes relating to trespassing and loitering. Trespassers and vandals can be prosecuted more successfully in California and other jurisdictions if such signs are posted in all languages consistent with the area’s demographics.

Fencing. Protective fencing is a must if your asset is to sit for an extended period of time.

Storm water management. Get up to speed on your jurisdiction’s Storm Water Pollution Prevention Program and accompanying Best Management Practices doctrines. Most states are very tough on enforcement in these areas. Sizeable fines are possible for not properly managing runoff and keeping silt on site.

Air-quality rules. Check with local air-quality management rules to make sure you understand them. In wind-prone areas such as California and Arizona deserts, you may need to control dust using mitigation measures recommended in local air-quality guidelines.

Outdated building codes. Make sure your dormant project wasn’t following building codes that are now outdated. Some projects have sat so long that jurisdictions may order the old builder of record or the new owner to comply with new structural, plumbing, electrical or ventilation codes. Such expense can be crippling. Work with the local government to find an affordable compromise.

Our best-practice recommendation encompasses all the areas set out above — and that has to do with government relations. You can’t go wrong by introducing yourself to the local government reps right up front when taking possession of distressed property.

Share your plans for the property with those local officials, whether you will be building it out and selling, or simply holding it pending litigation. Assure them that you wish to maintain the property and avoid code violations. You’ll win friends right away. Let them know you’re in town, establish an open line of communication up front. Chances are that at some point you’ll be dealing with them anyway.

*Rick Peters is the president of R.E. Peters Company - one of California’s leading experts in the development and construction of large-scale residential developments. The company’s focus is on assisting banks and other landowners with assessment and management of distressed residential and commercial real-estate assets.