Steps to take when considering urban facilities. (An Advertising Supplement to the Los Angeles Business Journal: Corporate Expansion & Relocation).

The hottest topic at real estate conferences these days is the need to refocus attention on the urban core, a concept that resonates loudly with those of us who live and work in Southern California.

For decades we have led the suburban movement, using our freeway system to move employees further away from urban areas. As lands becomes scarce and expensive and we begin to understand the impact of long commutes on the mental health and productivity of workers, we must re-examine the latent benefits of the urban environment. This re-examination has led to the development of a variety of mixed-use projects, loft apartments and upscale multi-family units constructed in inner cities.

Businesses too have begun to perceive the value of being closer to urban centers with their accessibility to more diverse labor pools, transportation corridors and potentially lower operating costs. However attractive urban relocation might be in theory, the practicalities can be daunting. The following seven steps should be carefully considered before entering into any agreement to acquire inner city commercial or industrial property.

Phase I environmental review

The first step in evaluating a potential urban acquisition is to take an "environmental snapshot" or non-invasive evaluation of a site. Phase includes a walk-through of the building and surrounding land and interviews with key employees of the company occupying the space.

Typically, a database search and analysis is also completed to determine if there are any indications of past problems with such things as hazardous waste disposal or toxic contamination. A potential site operator might also talk to neighbors to understand what problems they have encountered in the area. Finally, the public record should be reviewed to determine if any regulatory actions may have been taken against the property.

Phase II review

If the Phase I overview raises any issues, a more intensive investigation should take place, including such procedures as obtaining soil samples and ground water testing. These samples should be tested for petroleum hydrocarbons, volatile organic compounds (VOCs), heavy metals or other contaminating substances. A prospective owner or tenant should complete an asbestos, lead paint and toxic mold screening. Without proper attention, these indoor air issues could lead to large problems.

Researching governmental records

Only certain governmental actions against a property or its owners will show up in the Phase I review. Therefore, an in-depth analysis should be initiated to discover what permits, requirements and restrictions have been granted or imposed upon the site by local and state governmental authorities. These could include air, water and hazardous waste permits or restrictions, some of which might circumscribe the uses of the facility, making it unworkable for your company.

During this phase, it should become apparent which environmental requirements, such as stormwater treatment, would apply to any proposed business at the site. There might also be an opportunity to have the site re-classified by applying for permitting and waivers from the appropriate authorities.

Meet with agencies

California has a host of local and state agencies with overlapping authority in the area of environmental land use, so it's important to make personal contact with the appropriate agencies to discuss the issues above. Additionally, should contamination be discovered, but you still have interest in utilizing the site, your discussions should include what types of requirements or regulatory relief might be available to assist with the clean-up.

Several such programs exist, including California and federal Brownfields programs and prospective purchaser policies which allow the potential buyer of a contaminated property (who was not responsible for the contamination) to limit liability by entering into agreements with agencies that could issue appropriate deed restrictions and covenants not to sue.

The Voluntary Cleanup Program also permits the expedited clean-up of a toxic site by an owner who funds the California Department of Substances Control's oversight and participation. For less complex sites, the Private Site Mitigation Program allows landowners to use certified individuals to oversee assessment and clean-up.

Spread the risk

You can limit your liability by obtaining an indemnity obligation from the seller or landlord for pre-existing hazards. If indemnities are involved, be sure that the indemnitor is a viable, on-going and creditworthy person or entity. Indemnity agreements, along with waivers of claims from past operators/owners and others, provide much-needed protection from future litigation. We also advise our clients to obtain environmental insurance which can either supplement or replace indemnity agreements. In addition, working with a properly licensed and credentialed environmental consultant can assist with this process.

Financing options

Many lenders do not lend in the urban core, especially for a contaminated site. Talk early and often to your lender(s) about the specific criteria for making such loans. Almost all lenders will require environmental insurance or solid indemnity agreements and might demand that the indemnity meet certain financial and credit requirements. Your bank might also require these agreements for unsecured or working capital lines of credit.

Seek counsel

Seek the advice of legal counsel at the very beginning of the process. Your attorney should be able to assist in reviewing the various documents discussed above as well as crafting the appropriate leases, waivers, and indemnity agreements. He or she should also be able to negotiate with public agencies as well as lenders and where necessary assist in retaining the various environmental, financial and other specialists you may need on the team.

While these action items are numbered from one to seven, many of them must take place simultaneously. Depending on the proposed site, other factors may also apply. Regardless of how well you follow these steps, when dealing with urban sites it's definitely a case of caveat emptor.

Kenneth A. Ehrlich is a partner in the Land Use, Environmental and Energy Department at the Century City law firm of Jeffer, Mangels, Butler & Marmaro. He is the immediate past chair of the Los Angeles County Bar Association's Environmental Law Section.