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The Importance of Due Diligence in Adaptive Reuse Projects

The Importance of Due Diligence in Adaptive Reuse Projects

By Les Jeter

Embarking on an adaptive reuse development is no small task. It takes a dynamic team that has the vision and fortitude to overcome challenges. Adaptive reuse projects also represent a significant investment in a community and a belief in the long-term growth of an area. These projects have become increasingly popular in recent years as demand for infill development rises and access to raw, developable land becomes scarcer. 

The adage that big rewards require big risks certainly applies to adaptive reuse projects. There is significant inherent risk on multiple levels, including working with an older property (which may or may not be dilapidated) and trying to transform a structure from its original use to something else entirely.   

This risk profile gives even seasoned developers pause and should encourage any team considering an adaptive reuse project to ensure they undertake a proper due diligence review before closing a deal. Understanding the existing conditions of sites and buildings under consideration for adaptive reuse is crucial to develop a full risk management picture and making an informed decision. 

What is Due Diligence? 

At its foundational level, due diligence is a review of an existing building or site to identify significant conditions that will affect the feasibility and cost of redeveloping that building or site. Another perspective is that professional due diligence provides insights before a deal closes. The findings can add confidence to move forward or at least identify areas of concern and prevent headaches later by avoiding a site if it doesn’t meet the financial criteria for the project.  

Due diligence investigations typically include a “walk-through” and “walk-around” survey of the structure by experienced professionals who can identify existing problems as well as emerging or potential concerns by visual observation. This process is best captured in three phases: 

  • Phase One: Conduct a preliminary site assessment that includes historical research and collecting any existing information about a building or site. Resources include historical records, insurance documentation and maps, and photos of the building and surrounding area. 
  • Phase Two: An on-site walk-through survey to document existing conditions through images and field notes. That documentation typically focuses on physical condition of a structure and those conditions visible to get a better understanding of potential problems. 
  • Phase Three: Prepare a detailed report that outlines what information has been gathered about a building or site and identifies potential items of concern as well as provides general guidance on what actions will be required for the project to move forward as planned.  

This due diligence report will provide a clearer picture of known or potential challenges present in an existing structure. For example, is the roof salvageable? Is the building structurally sound? Is evidence of water damage acute or could there be significant issues lurking behind walls and under floors? 

These are the types of questions a due diligence report will address to provide the development team with initial context on a structure. Those details are crucial components in crafting a project’s risk profile and determining whether the investment will work. 

Why It Matters

The condition of a structure under consideration for redevelopment can be the ultimate dealmaker or dealbreaker. Most sites are adaptive reuse candidates because they’ve become neglected, or their original design no longer fits the highest and best use for that site. 

Before committing to a deal, the development team should ensure that the due diligence in these six key areas have been conducted: 

  • Building Envelope: Assess the condition of the roof, walls, windows, doors, and other key components. 
  • Environmental Hazards: Research potential hazards on site, such as lead paint, asbestos, mold, or other contaminants. 
  • Structural Condition: Evaluate the building settlement, deterioration, and local failures or damage to existing elements. 
  • Site Conditions: Examine drainage, the condition of existing pavements, and other site features, such as parking.
  • MEP Systems: Inspect visible mechanical, electrical, and plumbing system elements for deterioration and wear or potential areas for new systems. 
  • Building Access: Assess the means of ingress and egress for the structure, including overall accessibility. An important note: Building officials prioritize code compliance before any other project consideration.  

These six areas are crucial items in any property condition assessment. Every due diligence report should include a review of these components because these six basic factors will aid in determining the viability of a project, including the extent of repairs needed and costs associated with making the site viable. 

Developers would be wise to use a professional with significant due diligence and engineering expertise. Having an experienced eye conducting the due diligence will reveal potential problems and opportunities that won’t be recognizable to individuals not experienced in dealing with these types of issues. For example, a leak in the roof is easy to address while a busted sewer line in the basement is exponentially more difficult. 

A recent adaptive reuse project in Richmond, VA highlights how these components collectively, or even individually, can make or break the feasibility of a redevelopment. The city’s historic East End theater had fallen into disrepair after decades of neglect. Located in a quickly redeveloping neighborhood, a development team saw the potential to repurpose the theater as a mixed-use project. Although overtaken by vegetation and missing its roof, a due diligence investigation found that the primary structural systems were actually in good shape. Furthermore, a scan of the building’s envelope revealed that although the roof was gone, the roof framing could still be used and the existing envelope was large enough to accommodate the proposed new space, saving the developer approximately $100,000 in new roof framing. This cost saving was instrumental in making the renovation more financially feasible.  

East End Theater before
East End Theater after

Be Ready for a Surprise

No matter the adaptive reuse project or type of structure, there will always be a surprise. You won’t be dismayed if you’re expecting at least one unusual finding, although there could be more than one. The surprise shouldn’t be a concern; it’s the extent or degree of the surprise that can make a development team reconsider a project. 

Common surprises are often related to hazards on site, such as no electricity, asbestos, mold, or even substantial amounts of bird droppings resulting in health hazards. Other common issues include structural damage due to localized failures, fire, water, or termites. 

Some findings can be so substantial that they prevent a project from moving forward. For example, if the existing structure cannot be repaired economically or is not constructed in a manner that allows for it to be adapted for the proposed new use, developers will give it a definitive “no go.” Another common scenario includes hidden limitations, such as restricted site access or drainage issues with large culverts or piping running under the building or site, that result in a project not being developed as planned or the site not being a viable candidate for redevelopment.

A key consideration, and sometimes a surprise for development teams, is making sure you have access to the structure. Can you see above the ceiling and are stairs passable? If not, make sure you have a ladder on site or access to drones when conducting due diligence. 

One such example comes from a 1910 power plant that was redeveloped into a stunning and popular waterfront restaurant. The structure had stood vacant for decades and when the development team and due diligence professionals first arrived on site, the building was so full of debris and junk that they couldn’t open the front door. It was literally impossible to enter. The debris had to be removed to simply allow due diligence to occur.  

Ultimately, the goal of a due diligence process is to ensure that the development team is fully informed and best positioned to make the right decision. A due diligence report will clearly document existing conditions and outline needed repairs. The report won’t include designs for those repairs or give extensive cost estimates. It’s still too early in the process for that level of detail. Thus, it’s important to recognize that results from a due diligence investigation shouldn’t be the deciding factor in greenlighting a project. Rather, those findings should be part of a developer or investor’s decision calculus. 

A crucial early step in any adaptive reuse development, investing in professional due diligence upfront is the best way to make an informed go-no-go decision about a project.

Leslie S. Jeter, PE  is a Manager in the Structural Engineering Division at Draper Aden Associates, a Mid-Atlantic engineering, survey, and environmental services firm. Based in the firm’s Richmond, VA office, he has over three decades of experience working with development teams on adaptive reuse projects and has conducted numerous due diligence investigations. He can be contacted at ljeter@daa.com.