That’s exactly what Atlanta — based InTown Suites did when it bought Suburban Lodges of America for $220 million in May 2002. In fact, CFO Bill Brewer says environmental assessments were a key part of the company’s due diligence in its purchase of 65 hotel properties from Suburban. “We wanted to make sure we were not inheriting obligations that were unrecorded,” says Brewer.
Typically, acquiring companies examine local, state, and federal records to determine potential environmental violations. If anything suspicious is discovered in an initial assessment, soil, gas, and groundwater samples can be taken to test for contaminants.
Such tests can lead to even more testing (which may or may not include additional sitework). On two recent occasions, for example, Toronto — based Fairmont Hotels and Resorts’s initial environmental assessments of target assets led to deeper inquiries. On further review, however, “the problems were not deemed to be environmental or structural problems, but rather deferred maintenance issues,” says Fairmont CFO Jerry Patava. Although no environmental liabilities were uncovered, the surveys did help convince Fairmont’s managers that they didn’t need to adjust their offer price.
That underlines a crucial point. When companies fail to conduct adequate assessments — environmental or otherwise — of assets, purchase prices can be way off. This is particularly true when real estate is a big part of the overall transaction, such as deals involving hotels or supermarkets.
Experts sometimes see even more rudimentary failures. In a few cases, acquirers have been known to buy companies without performing title searches and full due diligence, including condition surveys of key facilities, on a target’s property holdings — a sure path to disaster, especially in places like Eastern Europe and China, where determining ownership of a property can quickly turn into a comedy of errors.
“It’s always important to know if a title is actually registered under the company you are buying,” notes InTown Suites’s Brewer, “and if there might be any recorded liens on the property.” To protect against nasty surprises, some companies purchase title insurance, whose cost can vary substantially from state to state. Generally, premiums vary anywhere from 50 cents to more than $5 per $1,000 of value. Taking out title insurance becomes absolutely crucial when acquiring a company with older properties, simply because existing policies held by the company may not be sufficient.
To be sure, gathering information about a target’s real-estate assets may be anything but easy. Many corporations manage their real estate in a decentralized fashion, with data stored in disparate, unconnected systems and databases. As a result, “a surprising number of businesses don’t know the value of their operational [real-estate] portfolio,” asserts RICS’s White. “And they have only a vague notion of what their real estate is costing them.”
For acquirers, pulling all the data together in order to assess the value and performance of a target’s portfolio can be a Herculean task — and can disrupt the timing of a deal. Once a deal is done, the acquirer then faces the problem of managing new portfolios and systems. That’s currently the case at SBC Communications. The Dallas — based Baby Bell has done several major mergers since 1997, and each company involved has come with its own real-estate-management system.