Stan Mullin specializes in the sales and leasing of industrial land and buildings in southern Orange County, California.

His areas of expertise include: entitlement, contract language, construction schedules, development, assessment district and community facility district bond financing and he specializes in corporate real estate matters.

Natural Hazards – The Seller’s Obligation to Disclose

Author: Stan Mullin, CCIM, SIOR

One of the most important steps that a seller of real property should take is the disclosure of any known hazards to, or defects in, a property to the prospective buyer. As a rule, the seller should disclose to the buyer any information that may be deemed important in the buyer’s decision to purchase.

One of the most useful documents to buyers of real property is the Property Information Sheet, produced by the American Industrial Real Estate Association, in Los Angeles. The form is designed to be completed by the seller and is provided to the buyer once the parties have reached agreement on the basic business terms of the sale. It is an outline that asked the seller about his knowledge on issues pertaining to: material defects in the property, the equipment that is a part of the property (i.e. HVAC and plumbing) and the soil condition. As well it addresses utilities, toxic materials, pending litigation that may affect the property, if the structure was constructed in compliance with building codes, matters affecting title and if any governmental proceedings are pending against the property (i.e. condemnation).

In addition, the seller is required by law to disclose information about natural hazards that may impact the property. The AIR has produced a form titled the Seller’s Mandatory Disclosure Agreement which addresses in detail the three areas of hazards sellers must investigate. Fire and flood hazards along with earthquake risk are the primary topics.

Earthquake Safety

Sellers must inform buyers if the property is located within an Earthquake Fault Zone or a Seismic Hazard Zone. The California Department of Conservation, Division of Mines and Geology produces Special Publication 42 which provides helpful information about fault rupture zones. If a property is located in a certain fault zone, the state of California may require that a state registered geologist perform a geologic report prior to site development.

If the building was constructed with pre-caste concrete prior to 1975, along with a few other circumstances, the seller must provide the buyer with a booklet titled “The Commercial Property Owner’s Guide to Earthquake Safety”. Produced by the state’s Seismic Safety Commission, the booklet provides a very thorough description of various hazards that a buyer may find in the property, how they can be identified and offers solutions to each area of risk. As well, the seller must provide the buyer with a completed “Commercial Property Earthquake Weakness Disclosure Report”. If the information in this report is acceptable to the buyer, the buyer would typically counter-sign the report and deliver it to the holder of the escrow.

An item commonly overlooked is the state’s requirement that the seller brace, strap or anchor any water heaters on the property, in accordance with guidelines set by the California Health and Safety Code.

Fire Protection

If the property is located within a designated State Responsibility Area, as delineated on a map prepared by the California Department of Forestry, The California Public Resources Code mandates that prospective buyers of real estate be advised if the property is located within a “wildfire area”. If the property is located within a wildfire area: a) the state of California may not be responsible to provide fire protection services (find out if your local municipality is responsible) and b) the buyer may be required to maintain certain firebreaks, periodically remove brush and perform similar fire mitigation measures.

Two sections in the Government Code also require the seller to inform the prospective buyer if the property is in a Very High Hazard Zone. In some business parks, the buyer of land may even be subject to design and construction requirements or restrictions, which would impact the work performed by an architect and contractor.

Flood Hazards 

Sellers are also required by government code to inform buyers if the property is located within an “area of potential flooding” in the event of a dam failure, and if the property is in a designated “Federal Flood Hazard Area”, as listed on maps prepared by the Federal Emergency Management Agency. Federal law also mandates that flood insurance may be required of the buyer in order to obtain financing for the development. 

If the Seller previously received Federal flood disaster assistance and the assistance was conditioned upon obtaining and maintaining flood insurance, federal law mandates that the new buyer be advised that he will be required to maintain flood insurance on the property. The law has some teeth in it because it goes on to state that if flood insurance is not maintained and the property is subsequently damaged by a flood, the buyer may be required to reimburse the federal government for any disaster relief provided.

How is a seller expected to find out if his or her property is in these various hazard zones? Most owners do not have the time or capacity to locate this information. Two firms that specialize in researching the requirements related to the fire, fault and flood issues covered in this article are: EQE International (888.373.7475) and Vista Information Solutions, Inc. (408.261.6450). Note - Be careful when comparing the cost of these reports as most reports are produced for each property parcel. Some firms will provide a discounted price if the property transferred involves multiple sites. As well, determine the degree to which these firms have insurance and will warrant the accuracy of their information.

Expect your broker to provide you with the information addressed in this article and to advise you on these issues when your are considering a sale or acquisition. Aware that he or she is not an expert in any of these areas, your broker should be able to help mitigate your risk (buyer) or liability (seller) by putting you in contact with the correct firms and agencies that do provide the expertise required in these matters. It goes without saying that you should consult with experts regarding these matters along with your legal and tax advisors before making any decision to sell or purchase property.

Next month’s article will follow-up last month’s topic with a focus on specific provisions, in the operating expense definition, which should be addressed in your next lease.

Stan Mullin is a Senior Vice President in the Newport Beach office of Grubb & Ellis. He is a member of the Society of Industrial & Office Realtors (“SIOR”) in Washington, D. C. and he specializes in corporate real estate matters. You can learn more about his firm and the SIOR by looking up www.grubb-ellis.com and www.sior.com, respectively. You can contact Stan by e-mail at stan@mcareceiverships.com. 

Richard L. Riemer is a real estate attorney in private practice in Santa Ana and is the attorney for the Forms Committee of the American Industrial Real Estate Association (“AIR”). Mr. Riemer drafted the Sellers Mandatory Disclosure Statement referred to in this article. You can contact the AIR at (213) 687-8777 or reach them through their web site at www.airea.com.