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Potential Commercial Property Rehabilitation Pitfalls in Texas

The growth of the tech industry and willingness of millennials to occupy live-work space has prompted commercial developers to rehabilitate old manufacturing, industrial and historical buildings into mixed-use ventures. Many of these structures have endured waves of changing industries stretching back to the early 1900s.

However, the loss of American manufacturing jobs has left many of these vast complexes empty and their commercial history somewhat of a mystery. For those looking to resurrect the vitality of these stone structures in Texas and turn a profit, watch out for these potential pitfalls.

  • Unpaid back taxes: Although it's uncommon with residential homes, commercial property owners often negotiate tax repayment plans with local municipalities. When purchasing a vacant building, for example, buyers tend to look at the yearly tax bill as a cost measure. But, behind that yearly figure could be an agreement for incremental installments to pay off back taxes. Once you purchase the property, you buy its debt as well.
  • Inadequate seller disclosures: In Texas, commercial property sellers are required to let you know if mold has been removed during the past five years or if there are underground tanks on the property. The state is also proactive about having sellers fill out disclosure of property condition forms that include knowledge about hazardous materials. There are two basic concerns buyers may want to consider: First, if the current seller took control of the property in recent years, it may not know what type of industry (or multiple industries) operated there previously. Second, if the seller is not forthright and fails to disclose all the details, you will have an uphill battle proving the seller acted in bad faith. During the largely unregulated 1970s, tremendous amounts of hazardous chemicals were dumped into the nation's rivers, streams and land, which had severe implications for manufacturing warehouses and industrial buildings throughout Texas. It is imperative to have the soil tested as the cost of remediation can financially ruin a rehabilitation project.
  • Zoning and Permitting: Large industrial warehouses have often housed various businesses over the years. However, they may have had one thing in common; they were once business operations. There may have been no reason to seek multi-use zoning in the past, but regulations enacted in cities across Texas (excluding the city of Houston, which has no formal zoning regulations) have changed this. Some of the more successful restoration projects have targeted key businesses and blended them with work-at-home and strictly residential tenants. For example, a complex that has boutique stores, a coffee shop, restaurant and even a live music venue creates a self-enclosed mini community that adds value to rental space. Further, various permits and pre-approvals may berequired before renovations can commendce on a building with a historical designation. Before purchasing commercial property for rehabilitation, it is important to check if local governmental approvals will be required prior to renovations.

Upsides for developers in Texas

Texas has been a leader in terms of tax incentives for commercial growth. The Texas Enterprise Fund, for example, has been a successful tool to promote competitive rehabilitation projects that include job creation. The state has numerous programs to help investors lift blighted commercial properties. Keep in mind that the local community has a vested interest in your restoration of a defunct manufacturing facility and creating jobs.

Seek legal advice

Rehabilitating an existing commercial property involves negotiating a tremendous amount of moving parts in advance. Such ventures can be quite lucrative for developers as long as they avoid financial setbacks during the process. When purchasing or revitalizing a commercial property, seek the advice of an experienced attorney from the law office of Stephenson Fournier.

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