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Commercial Day, January 22, 2014
Southland Regional Association of Realtors

Commercial real estate transactions have always been complex, complicated affairs, yet in this modern age only knowledge, experience and paying strict attention to due diligence can protect owners, buyers, investors and commercial brokers. The price for overlooking a single detail can be devastating.

Take for example, the purchase of a building in downtown Los Angeles, said Ralph Odierna, a veteran broker who spoke at the fourth annual commercial day presented by the Commercial & Investment Division of the Southland Regional Association of Realtors. The educational event is designed to propel commercial brokers to the next level of expertise.

The program was moderated by Dennis Dishaw. Additional speakers included Heidi Prosser, Jeffrey Shore, Joyce Soriano-McDowell, Matt Kuczkowski and Gary Aminoff. More than 120 real estate professional and investors attended.

In Odierna's example, a buyer for a downtown building appeared with $75 million cash, which in a prior era would have meant a quick sale. In today's post 9/11 age and with illicit drug money rampant, the brokers had made a fatal mistake - they failed to verify the source of the cash.

"Thirteen months later Homeland Security would not release the funds. They couldn't prove where the money came from," Odierna said. "It's a different world today. Terrorism and the source of funds is the number one concern of Homeland Security. They will track where every dollar comes from." Not only must the source of huge sums be verified, brokers must know that transactions emanating from some countries are prohibited. Fines for dealing with banned countries can be crippling.

"Not all foreign buyers can be your clients,"Odierna said. "There's so much money on the street from foreign clients, but be cautious. Know that almost all cash deals out of Mexico get flagged."

Commercial brokers who make mistakes can expect one outcome, he said - a Lawsuit.

"Brokers have a target on their breast," Odierna said. "They are the sued the most the most in California, even more than doctors."

Avoiding problems for all parties means performing due diligence research on commercial transactions, which was the focus of Matthew Rodda, another expert speaker at the educational event. Changes in rules and regulations that went into effect in November require file reviews and certain tests when specific types of commercial property were involved.

"Ninety-nine percent of lenders require a Phase I ESA report," Rodda said. "Most buyers know about it, but if they don't it's your job to tell them. If the buyer later wants to refinance or flip the property, they will need it...Even in a cash deal, a Phase I is critical."

The report researches a property's history, sometimes reaching back to the late 1800s. It's particularly critical to complete in Los Angeles, he said. Many corner commercial lots once had gasoline stations, plus, the city sits atop about 28 oil fields. Depending on the proposed new usage, the lot may require expensive, extensive remediation, especially if there's a chance gasses or vapors could leach up to the surface or down into ground water.

Testing is wise, but "don't be dragged into investigations that are not necessary," Rodda said. "If ground water is at 15 feet it's a concern, but maybe not if it's at 50, 75, or 100 feet."

Vapor intrusion is the issue de jour that is complicating a lot of commercial projects, Rodda said. "As a landowner you have a responsibility to protect inhabitants of that structure....It cannot be dangerous to tenants or employees."

The tougher standards are not necessarily a "deal killer," he said. Yet the extend of the risk can be determined only by considering the source and scope of the contamination and understanding the make up of the property and surroundings. For example, oil wells once were prolific throughout Los Angeles, with some wells still pumping. Building above an oil field, which is generally contained, is less a concern than the possibility of a methane gas leak, a frequent by-product of an oil well.

Commercial brokers need to know where oil fields are located and they must understand the mitigation rules required by Los Angeles City and County. It's a lot to learn.

"Take commercial broker classes," Odierna advised commercial brokers. "You have to have the knowledge to know what you're doing".

2013 Real Estate Symposium Articles

Balance Needed in Downtown L.A. Urbanization Part 1

Essential to Plan, Avoid Big Surprises Part 2

FAR is Key to Success for Commercial Investments Part 3

Battling Bedbugs and Bad Tenants Part 4
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