“I CAN’T BELIEVE THEY ARE SELLING IT SO CHEAP,” A CHECKLIST OF POTENTIAL PITFALLS FOR WOULD BE REAL ESTATE MOGULS –

- TABLE OF CONTENTS -

I. The Call

II. The Memo
1. Zoning
2. Occupancy Permit
3. Platting
a. Utilities
b. TCEQ Approvals
c. Plat Preparation
d. Sewer
e. Resistance from Neighbors
f. Access
g. Minimum Parking Requirements
4. Underground Storage Tanks
5. Environmental Inspection
6. Structural and Roof
7. Asbestos
8. PCBs
9. Restrictions on Use
a. Restrictive Covenants
b. Property Owner Assessments
c. City Ordinances
d. Aircraft Protection Zones
e. Antiquities Protection
f. Burial Sites
10. Building Setbacks
11. Wetlands and Flood Zones
12. Storm Water Permit Rules
13. Endangered Species Act
14. Landscape and Scenic Corridor Ordinances
15. Americans With Disabilities Act
16. Survey
17. Ad Valorem Taxes
18. EMF’s
19. Open Pits and Quarries
20. Summary

“I CAN’T BELIEVE THEY ARE SELLING IT SO CHEAP!” -

A CHECKLIST OF POTENTIAL PITFALLS FOR WOULD BE REAL ESTATE MOGULS

I. The Call.

Receptionist: “Mr. Becker, you have a call on line 1.”

Mr. Becker: “Who is it?”

Receptionist: “It’s Mr. Smith, and he sounds excited.”

Mr. Becker: “Hi John, how are you doing?”

John Smith: “Dougie, you won’t BELIEVE the deal I have just gotten! I am at a pay phone here at the FDIC Auction, and I have just beaten everyone else’s bid on a warehouse property out by the airport. It is in that area of town that was just brought into the City. The building has been abandoned and needs a lot of work, but there is plenty of room to add on, and I absolutely STOLE the property.”

Mr. Becker: (Faintly) “Congratulations. Have you already signed the papers?” John Smith: “Oh yeah, there is nothing you need to do, other than sign on the contract to indicate that you advised me before I waived my Deceptive Trade Practice rights. I had to put down $10,000.00 earnest money, and the closing is in 30 days.”

Mr. Becker: “How much did you pay?”

John Smith: “Only $500,000.00 for a 50,000 square foot warehouse, with 5 acres of land! It would cost me double that just to replace the building! The adjoining land is pretty overgrown and marshy in spots, but it shouldn’t cost too much to clear it and put in some fill material. Listen, I would like you to look over the papers just to make sure that everything is O.K., you know, title-wise and all. Don’t spend too much time.”

Mr. Becker: “I’m leaving on my vacation tomorrow morning, but what I can do is dictate a memorandum for you this evening and leave it with my secretary, Delores, setting out for you everything that I can think of which might have a bearing on your ability to realize the full benefits of your bargain. That will get you started, and then when I get back, we can determine if any of these matters will create a problem.”

John Smith: (Warily) “That’s great, but rather than dictating something you will have to charge me for, don’t you have an article or something I can read that will tell me what I need to know?”

Mr. Becker: “No, but maybe I’ll be able to use it as part of an article someday, so I won’t charge you for it.”

John Smith: “What a guy!”

II. The Memo.
TO: JOHN SMITH
FROM: DOUG BECKER
SUBJECT: ABANDONED BLDG. AND 5 ACRES IN NEWLY ANNEXED AREA NEAR
AIRPORT

The following is a checklist of items which you should consider in evaluating this property.

1. Zoning - Zoning regulation has been delegated to local political subdivisions from the State of Texas as outlined in Chapter 211, Texas Local Government Code. As land recently annexed into the City, the current zoning of the property is Temporary R-1. In order to operate any type of industrial business, the property must be zoned I-1 (Industrial). In addition, if this land overlays the Edwards Aquifer Recharge Zone, the exact zoning for the property must be “I-1 ERZD (Edwards Recharge Zone District)”. Since this property was previously located outside the city limits, it carried no zoning designation. When the city annexed this property, it assigned a “Temporary R-1″ designation (single family residential). It is incumbent on the property owner to file a request with the Zoning Commission to change the zoning to a designation compatible with the property owner’s business, if the property owner does not desire an R-1
designation. The property owner typically has one (1) year from the date of annexation and an assignment of the Temporary R-1 designation to complete this task. If the property owner does not cause the property to become rezoned to conform with the existing use, the property owner may continue to use the property for its existing use as a “Non-Conforming User”. If the property thereafter ceases to be used for the non-conforming purposes, then the
non-conforming rights are lost, and thereafter, in order to secure an occupancy permit for a non-conforming use, the property must be re-zoned for the proposed use. The filing fee for a zoning change on this property will be approximately $1,000.00. The cost for preparing and presenting a zoning change application typically runs from $2,500.00 and up.

2. Occupancy Permit : In order to occupy the property and use it for any business, it is necessary to secure from the City a Certificate of Occupancy. Once a request for certificate is filed, a building inspector will visit the building to determine whether or not the current condition of the building complies with the various city codes and well as the fire code. Because this building was likely built before the city annexed the property, there was no requirement that the building be built to city code requirements, and as such, there is a likelihood that some aspects of the building will be out of
compliance. Possibilities include inadequate fire suppression systems, undersized doors and hallways, and encroachment of the walls of the building on minimum setback requirements (minimum distances from the property line). (I will go into more detail on the various types of setbacks you may encounter later inthe memo). If non-compliance is found, and modifications to the building cannot be made without great hardship, a request for a variance may be filed with the Board of Adjustments. Approval by the Board of Adjustments is not automatic, and depends upon staff recommendations, whether or not true hardship (as opposed to negligence on the part of the persons constructing the building) can be shown, and possible objections by neighbors. My experience with the fire department is that its inspectors can be arbitrary and inflexible. The bottom line is that an experienced code compliance consultant needs to be retained to inspect the building to determine what, if any, remedial work will be required.

3. Platting : Platting regulations are found in Chapter 212, Texas LocalGovernment Code. Before the city will issue a Certificate of Occupancy for the
building, the city will require that the property be platted into a lot. Platting is also a condition to the issuance of a building permit to do repair or modification work. Platting is a process whereby the city converts the metes and bounds (the surveyor’s description) of the property to a uniform lotdescription recorded in the Plat Records of the County. The platting process allows the city to ensure that contiguous lots in subdivisions have proper drainage, access through dedicated city streets, are serviced by city owned utilities, and will not impede safe traffic flow to and around the proposed lot to be platted. The property was not previously platted when the improvements were built, because the property was outside the city and its five mile extra-territorial jurisdiction. As a part of the platting process, the following occurs:

a. Utilities  This property probably has a private water well and septic tank. If utilities are readily available nearby, you will be required to pay the expense to extend the utilities to the proposed lot. In this case, water service and sewer service would be required to be extended to the property in the order to eliminate the use of the water well and the septic tank. The city’s policy is to eliminate the use of water wells and septic tanks throughout the city, and will not grant a variance for their continued use except under circumstances whereby the city is unwilling to extend water or sewer service to a location reasonably near the proposed lot. Moreover, if the well utilizes the Edwards Aquifer, recent legislation passed by the Texas Legislature may prevent you from activating the water well, or limiting your use, at best.
b. TCEQ Approvals  Because the proposed lot overlays the Edwards Aquifer Recharge Zone, the Texas Commission on Environmental Quality (TCEQ) requires that a Water Pollution Abatement Plan be filed with and approved by the TCEQbefore a plat is filed. The purpose of the Water Pollution Abatement Plan (WPAP) is to ensure that the Edwards Aquifer will not be contaminated by development of property on the surface. The owner is required to present a plan which demonstrates to the Water Commission that any runoff from parking lots or discharges from the operations of the business will not result in contamination of the aquifer. The TCEQ is especially interested in terminating the
use of septic tanks over the aquifer. You can expect to wait from four to six months for approval or disapproval of the WPAP after it is filed. In addition to the filing fee, engineering fees for the preparation of the Water Pollution Abatement Plan can cost as much as $5,000.00 and up, depending on the complexity of the plan.
c. Plat Preparation -An engineering firm will have to prepare the plat. In addition to the fees payable to the engineer, platting fees are payable to the City which will range in the area of $4,000 per acre. Under current city ordinances, those fees will go up, based upon the amount of “Equivalent Dwelling Units” (“EDU”) of sewer flow which is expected from the activities at your property.
d. Sewer -  In assisting another client on property in this vicinity, we were advised that the closest available sewer line was at or near capacity. If there is no available capacity for the line, the city could impose substantial additional costs as a condition to allowing you to hook up to the line,including the possibility of making you pay for a portion of the cost of
installing a larger line. The problem is exacerbated at the current time due to the presence of a number of “illegal” taps in the existing line from other property owners in the vicinity.
e. Resistance from Neighbors : In conjunction with our work for another client, substantial organized resistance from the Deer Haven Property Owner’s Association and the Snooty Ridge Condominium Homeowner’s Association was
encountered when the other client attempted to re-zone his property from R-1 to C-2. It is possible that the owners may not be as resistant to your proposed use of the property, but the owners of property located within 200′ of your property
will have the opportunity to object at the hearing conducted by the Planning Commission on your proposed plat, and at the Zoning Commission on your proposed re-zoning of the property.
f. Access : Current access to the property is apparently over a private road designated as Old Bumpy Road. As a condition to platting, the city will attempt to require that the road be dedicated so that the platted lot abuts a public
road. In order to dedicate a public road, the road must be built according to city specifications, and the adjoining landowners must agree to the dedication of the road. An engineer must be consulted to determine the cost of bringing the road up to city specifications. My experience is that you probably would not have difficulty in getting the other adjoining landowners to agree to the dedication, but they are unlikely to be willing to contribute to the cost of
upgrading the road. As an alternative, you may be able to secure a variance from the Planning Department in order to allow you to continue to use the easement if you can show that the adjoining lot owners are not willing to agree to the
dedication. Further, your owner’s policy of title insurance may not cover any loss arising from inadequacy of access to the property.
g. Minimum Parking Requirements -Various City codes require a minimum number of parking spaces depending upon the type of activity on site. For example, the San Antonio City Code requires 1 parking space for every 800 square feet in a manufacturing building, 1 space for every 300 square feet in an office building, and 1 space for every 100 square feet in a restaurant. As such, the number of spaces required will vary depending on the use of the building.

4. Underground Storage Tanks : Regulation of underground storage tanks has been delegated to the TCEQ by virtue of Chapter 26, Texas Water Code. In reviewing the auction sales contract which you faxed down to me, it indicates that the FDIC recently removed underground storage tanks from the property. During the removal process, it was discovered
that the storage tanks had leaked, contaminating the soil surrounding the tanks. As required by law, the leak was reported to the TCEQ, and the FDIC took action to excavate the contaminated soil. The alternative remedial
action plan proposal (“Plan”) prepared by the FDIC indicates that the FDIC was unable to remove all of the contaminated soil, due to difficulties in excavating the limestone, and the depth of the hole. The FDIC has requested approval from the TCEQ to leave the rest of the contaminated soil in place, and backfill the excavated area. I understand that the contaminated soil has not yet been removed from the site, and the hole has not been back filled, and as such,
I assume the TCEQ has not yet approved the FDIC’s Plan. Under environmental laws, in order for you to avoid being held responsible for cleaning up the contaminated soil, you must require that all contaminated soil
be removed prior to purchasing the property. If you proceed to purchase the property with knowledge that contaminated soil is in place, you are at risk that a government bureaucrat or adjoining landowner may at some point in the future file suit to require you to remove the contaminated soil. In addition, if gasoline has migrated off your site onto an adjoining landowner’s site, you can be held responsible for the cost of removing the contaminated soil from the adjoining landowner’s site. The only way to possibly avoid this expense is to conduct additional testing, through the drilling of test wells (called “monitor wells”), in a perimeter around your property, in order to determine whether or not any hydrocarbons have migrated away from the excavated area. If the monitor wells reflect no migration of hydrocarbons, you will probably be deemed to have conducted enough due diligence in order to avoid
liability to third parties. If it is subsequently determined that migration did, in fact, occur, and that the monitor wells failed to disclose this fact, you would probably not be responsible for the cost of cleaning up the contaminated
soil, even though the original owner of the tanks probably would be liable. The cost of installing wells to determine whether or not off-site migration has occurred can exceed $5,000.00 per well.

5. Environmental Inspection : Regardless of the fact that the FDIC Auction Contract attached a copy of an environmental report prepared by the FDIC, it is imperative that you secure the services of a qualified environmental inspection firm to prepare a “Phase I” environmental evaluation. Without the benefit of a Phase I environmental inspection, you may be held responsible as a “potentially responsible party” for the cost of remediating any environmental problems on the property to which you would have been alerted had you secured such a report. The cost of an environmental inspection typically ranges from $2,500.00 and up. If the inspection indicates a need for additional testing, such as test wells, lab analysis, etc., the cost of such “Phase II” testing will typically exceed $5,000.00.

6. Structural and Roof - A competent engineer should be hired to make a complete structural inspection of the building so as to ensure that there are no latent defects. In addition, a roofing contractor should inspect the roof of the building to determine how soon it will need replacing, and the estimated cost.

7. Asbestos: Federal and state laws require notice and special removal procedures to be utilized in instances where asbestos or asbestos containing materials (“ACM’s”) are present. Because you intend to do substantial renovation work in the building, in the event asbestos is present, you will need to hire a certified asbestos removal contractor, and utilize the services of a third party inspector to confirm that asbestos has been properly removed and disposed of. Asbestos need not be removed if it is in “non-friable” condition, however, you should be aware that most lenders treat any building which contains asbestos as being virtually radioactive, and you will be unlikely to secure a loan if it is not removed. Relevant federal requirements are located at 40CFR763, and state law requirements can be located at Article 4477-3 of the Texas Revised Civil Statutes, and Texas Administrative Code Title 25, Section 289.141. Where asbestos is of a sprayed on acoustic type which has to be scraped off, the removal cost can range from $3.00 to $6.00 per square foot for the removal contractor, plus charges of approximately $300.00 per day for the independent third party inspector.

8. PCBs -  PCBs are a highly toxic chemical commonly utilized in conjunction with transformers and electrical equipment. The EPA has required that all remaining PCB transformers in use near commercial buildings must be removed. Because PCBs are commonly found at abandoned manufacturing facilities, it is imperative that soil samples be taken in and around the facility to confirm that no disposal has occurred on site.

9. Restrictions on Use -  There may be restrictions on the use of the property to specific authorized uses in both the deed records and in government ordinances.
a. Restrictive Covenants -  A title search should be conducted to determine if there are any uses which are prohibited in restrictive covenants recorded as a part of earlier development affecting the property. In addition to restrictive covenants, other potential sources of land use regulations appear in deeds and other instruments in the chain of title. These covenants are normally picked up by the title company and attached as part of their title commitment. Additional problems arise when prior land use restrictions have been abandoned, such as the case when a former developer of the property has filed bankruptcy and/or lost the property to foreclosure.
b. Property Owner Assessments - Many land use development schemes establish the property owner assessments, with such funds typically used for maintenance of “common” areas benefiting all property owners within the land development. Presumably, the FDIC will pay for all assessments accruing prior to the conveyance, but you should familiarize yourself with the assessment provisions, including the procedures for increasing assessments, modifying land use designations and amending the land use scheme as a whole.

c. City Ordinances -  Typical city ordinances limiting use of property include historic overlay districts and improvement districts utilizing federal grants. It is not uncommon for Urban Development Action Grants to contain use restrictions in the area affected.

d. Aircraft Protection Zones -  Authorized by Chapter 241, Texas Local Government Code, areas near airports and air force bases may be surrounded by aircraft protection zones (APZs) which are designed to limit the potential for injury to persons or property in crash zones around airports. They limit the density of construction and can be enforced by the cutting off of federal funds and insurance (VA and FHA) if ignored.

e. Antiquities Protection -  The Texas Department of Antiquities Protection now requires that an antiquities survey be secured anytime a subdivision is built where federal permits are required. Because of the new EPA storm water rules (which will be discussed later in this memorandum) any new subdivision will require that the developer confirm that there are no antiquities in the vicinity (such as Indian burial mounds, battlefield sites, old graveyards, etc.).

f. Burial Sites -  Under Chapter 711, Texas Health & Safety Code, dedicated cemetery property must be used exclusively for cemetery purposes until (i) the dedication has been removed by district court order, or (ii) maintenance of the cemetery is enjoined or abated as a nuisance by county court order. In order to remove the dedication by court order, the applicant must establish that all of the interred remains have been removed and the applicant’s property value is affected. In order to abate the operation of the cemetery as a nuisance, the applicant must establish that the cemetery has been neglected so that it is offensive to the inhabitants of the surrounding section and has no perpetual care fund regularly and legally established. If the cemetery is abated as a nuisance, the court may order the removal of all bodies, monuments, tombs and other similar items from the cemetery to a perpetual care cemetery.

10. Building Setbacks -  There are a number of sources for building setback requirements. The following need to be reviewed to determine what setbacks affect the property:

 a. Plats.

b. Restrictive covenants affecting each lot in the subdivision.

c. Zoning code and scenic corridor requirements, which requirements vary depending on whether the property adjoins a business district, an industrial district, or residential district. The setbacks can vary widely, depending on the uses of both your property and your neighbors.

d. Fire codes may impose a protective zone of up to 60 feet on 3 sides of the building within which no improvements may be constructed. Recently, the City has begun to impose a requirement that owners of property record deed restrictions setting forth the protective zone. Previously, the fire department relied upon the City Building Permit Office to control construction in fire protective zones. If fire protective zones are not maintained, the fire department can require far greater internal protection in the form of sprinklers and fire walls.

11. Wetlands and Flood Zones - You indicated that you would like to fill part of the marshy area in order to reclaim that property for future construction. You should be advised that Section 404 of the Federal Clean Water Act prohibits the placing of any fill or dredge material in property classified as wetlands or flood plain without a permit issued by the U.S. Army Corps of Engineers. The fact that the land is “marshy” in and of itself is not determinative, but you should also be advised that it is not necessary that the site be “wet” all year, or even most of the year, to be classified as “wetlands” under current regulations. You should retain the opinion of an expert in this area prior to filling any potential wetlands area. Moreover, in order to officially remove land from a flood zone (and thereby be able to build in that area) you must apply for a permit and request the Corps to amend their flood plain maps, a process which can take up to two years.

12. Storm Water Permit Rules -  Under EPA’s National Pollutant Discharge Elimination System (NPDES) permit program, prior to commencing any construction involving 5 acres or more, the owner must perform certain rain detention and erosion control measures on the site so as to minimize run-off from the construction site. Manuals for compliance with the requirements were published recently by Thomas Publishing Group (1-800-424-2959), and by Government Institutes, (301-251- 9250).

13. Endangered Species Act -  You indicated that there is heavy undergrowth on the site. Before removing any undergrowth, you should first conduct a site assessment to ensure that there are no federally listed threatened or endangered species on the site nor potential habitat for the same. In the Central Texas area, there are two species of federally protected birds, the first being the Golden Cheeked Warbler, and the second being the Black Capped Vireo. The Golden Cheeked Warbler utilizes mature ash juniper (cedar trees). The Black Capped Vireo utilizes shrubby low growing (to the ground) deciduous vegetation. Under the Endangered Species Act, a “take” is defined as the killing of, harassment of or alteration of behavior which has been interpreted to include the removal of vegetation utilized by a protected species. With regard to the Golden Cheeked Warblers, the only way to determine if that particular species actually utilizes the area is to conduct a survey during the spring breeding season. In the event potential habitat for an endangered species is located on the site, the U.S. Fish and Wildlife Service is likely to request three years of surveys with negative results before their office will issue a non-impact letter. Additionally, if the survey results in the location of an endangered species on the site, buffer zones are typically recommended from 250 to 500 feet around those areas described as habitat. The Fish and Wildlife Service typically recommends that any external construction activities associated with a development in the vicinity of an endangered bird habitat not be conducted during a time period extending from March 1 through August 1.

14. Landscape and Scenic Corridor Ordinances –

Most large cities in Texas now have landscape and/or scenic corridor ordinances designed to require a minimum amount of landscaping in conjunction with any new development. Many of the ordinances are tied to the number of parking spaces in a parking lot, and others require a minimum number of trees to be planted on the site. The scenic corridor ordinances also contain certain setback requirements, which can be variable, depending upon how much landscaping is placed on the site. For example, the San Antonio City Code requires a 60 foot setback from interstate highways, unless the front 10 feet is landscaped, in which case the setback is reduced to 25 feet.

15. Americans With Disabilities Act -

Title III of the Americans with Disabilities Act sets forth specific requirements for all new construction involving “commercial facilities”, and requires that “public accommodations” be made, to the extent “readily achievable”, accessible to persons with disabilities. Basically, any portion of your building which will be visited by the public or business invitees must be made accessible, which will require the installation of handicap parking spaces, wheelchair ramps, accessible doors, restrooms and the like. An ADA consultant should be retained to provide you with a cost estimate for bringing the facilities into compliance with the Act. Additional requirements under Title I relate to ensuring that none of your employees will be discriminated against in the use or enjoyment of facilities based upon a disability.

16. Survey – It is critical that you secure a survey of the property for the purpose of not only identifying the borders of your property, but also locating the improvements on the property. The survey can be used to determine whether or not any of the improvements are built over setbacks or easements, and will also reflect any encroachments or overlappings of improvements near the border of your property. You should insist that the legal description in the deed conveyed to you tracks the legal description in the survey.

17. Ad Valorem Taxes -  Presumably, your purchase from the FDIC will prorate all outstanding ad valorum taxes and you will be responsible only for taxes accruing after the conveyance. However, your title policy will not insure any “rollback” taxes which may be assessed pursuant to Section 23.55, Texas Property Tax Code, if the use of land formerly appraised for agricultural purposes changes subsequent to your ownership. In such event, you will be responsible, and your title policy will not insure, for the difference between the taxes which were actually paid in the five year period preceding the change of use and the taxes which would have been paid had the land not received agricultural appraisal, plus interest at an annual rate of seven percent (7%). You should therefore confirm that the property has not received any agricultural appraisal in the preceding five years and further should verify the property’s current appraised value with the county’s appraisal district. You will receive notice of the appraised value only if (1) the appraised value of the property is greater than it was in the preceding year, (2) the appraised value of the property is greater than the value rendered by you; or (3) the property was not on the appraisal roll in the preceding year.

18. EMFs -  High power electric lines create electromagnetic fields (EMFs). Some research reports indicate that there may be a correlation between these fields and a higher incidence of certain types of cancer, such as leukemia. There have been a number of lawsuits filed in California, New York and other states, alleging that the value of properties in the vicinity of high power lines is diminished by “cancerphobia” relating to perceived risks of EMFs. Regardless of whether further research will ultimately bear out the truth of these concerns, there will undoubtedly be litigation against utilities, real estate agents and others relating to these lines. If there are high power lines in the vicinity of the property, consideration needs to be given to the possibility that the lines may affect the marketability of the property, or might expose the owner to liability for EMF related claims from employees working in buildings on the property.

19. Open Pits and Quarries – The Texas Aggregate Quarry & Pit Safety Act was enacted in response to the tragedy in the Valley where a Coca Cola truck collided with a school bus, knocking it into a quarry partially filled with water, killing a number of school children. The Act requires quarry owners to file reports listing all quarries located within 200 feet of any thoroughfare, and to construct berms to prevent vehicles from inadvertently falling in. The filing fee for the reports is $500.00 per pit.

20. Summary -  This “parade of horribles” is not intended to dissuade you from investing in the property, but rather, to alert you to those items which must be considered in your analysis of the amount of time and money which will have to be invested in this project. It would be far better to risk the loss of earnest money rather than experience the loss of a substantial investment as a result of buying in the dark. In this regard, because the FDIC auction contract form states that specific performance will not be enforceable against the government, and because the buyer’s sole recourse in the event of a default by the FDIC is return of his earnest money, it is arguable that there is no mutuality of obligation, with the result being that you might be able to get your earnest money back should you so choose.

Doug Becker

DOUGLAS W. BECKER
COMMERCIAL ESCROW MANAGER AND UNDERWRITING COUNSEL
CHICAGO TITLE INSURANCE CO.
270 N. LOOP 1604, E.
SAN ANTONIO, TX. 78232
210-482-3560
DOUG.BECKER@CTT.COM

See Below for Helfpul Links:

BLOG-DOUG-BECKER-I Can’t Believe They Are Selling it So Cheap! A Checklist of Potential Pitfalls for Would Be Real Estate Moguls-2011 update