With the desire by many Arizona residents to experience a more urban lifestyle, the repurposing of commercial buildings/areas has become very popular over the last seven years. These projects can thrive as evidenced in Phoenix by the Seventh Street Corridor, Roosevelt Row, and ASU’s downtown campus, but it is important to note that real estate development involving repurposing requires thorough due diligence, significant time, and a relatively large scope of review.
The good news is that most of the due diligence items to be considered are common to any real estate project. The bad news is that the failure to investigate and evaluate the risks might leave an investor with limited prospects for salvaging the initial investment.
If redevelopment will be pursued by a prospective purchaser, great care is required to identify and assess risks. Some of the key issues to address include:
Title Review: Reviewing the title, including an ALTA/NSPS survey is essential. Obtaining title insurance in the amount of the purchase may not adequately address the scope of the risk, where the “fully developed” value is projected to be worth more than the cost of the land. (Consider obtaining “subsequent issuance” endorsements.) Potential problems include covenants of record, access issues, easements, and use restrictions, architectural approvals, or other burdens, including sharing of amenities, including parking, with third parties.
Zoning and Entitlements: The regulatory powers of the local municipality must be vetted. Even with the support of a project by city staff, the neighbors may have an opportunity to intervene. Zoning and building codes will control all aspects of a development, including the use, architectural guidelines, density, access, parking and landscaping. Decisions regarding whether to demolish and reconstruct or to scrape and build could be swayed based on grandfathering of non-conforming uses, applicable fees, and rights of neighbors to object.
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