Key Takeaways
- Title commitment review, including a careful analysis of Schedule B-II exceptions, is the starting point for owned real estate diligence. Many specific exceptions are deletable with an updated ALTA/NSPS survey, lien waivers, or endorsements, but some run with the land and cannot be insured away.
- A Phase I ESA conducted under ASTM E1527-21 is the threshold environmental review for most M&A transactions. Recognized environmental conditions identified in the Phase I report are the key trigger for Phase II sampling and laboratory analysis.
- Property tax abatements, TIF obligations, and economic development agreements often contain change-of-control provisions that trigger recapture, reassessment, or government approval requirements. These must be identified before signing a purchase agreement.
- Real estate diligence runs in parallel with business diligence but operates on a different timeline. Title, survey, and environmental reviews each have their own ordering and processing times that must be mapped into the M&A closing schedule from the outset.
M&A transactions that include owned real property require a diligence track that runs parallel to, but is distinct from, the financial, legal, and operational due diligence conducted on the business itself. Real property carries legal characteristics and risk categories that do not appear on the target company's financial statements: title encumbrances, easements, environmental conditions, zoning restrictions, and regulatory obligations that attach to the land and transfer automatically to a buyer regardless of what the purchase agreement says. The buyer who understands these risks before signing is positioned to price them, negotiate appropriate representations and indemnities, or renegotiate deal terms. The buyer who discovers them post-close inherits them.
This sub-article is part of the Real Estate in M&A: A Legal Guide. It covers the complete property diligence framework for M&A transactions involving owned real estate: how to read a title commitment and its exceptions, what ALTA survey standards require and why a current survey matters, the scope and limitations of a Phase I ESA, the decision framework for Phase II, how to assess zoning compliance and expansion rights, the diligence required for property tax abatements and TIF agreements, mineral and riparian rights, mechanic's liens, landmark restrictions, wetlands and floodplain designation, and which title insurance endorsements are most important for business acquisition contexts. Readers dealing with the structuring of owned real estate at close, including sale-leaseback transactions and OpCo-PropCo separation, should also review the companion sub-article on sale-leaseback transactions in M&A.
Acquisition Stars represents buyers and sellers in M&A transactions involving owned real property across a range of industries and property types. The framework below describes property diligence practices as a general matter. Nothing in this article constitutes legal or environmental advice for any specific transaction; each property requires individualized analysis of title, physical condition, environmental history, and applicable local law.
Title Commitment Review: Structure and What to Look For
The title commitment is the title insurance company's offer to insure title to the property, subject to the exceptions and conditions listed in the commitment. It is the primary document through which a buyer learns the state of record title before committing to close the transaction. Experienced real estate counsel reads a title commitment not just to confirm that title exists, but to identify every encumbrance, condition, and restriction that will affect ownership and use of the property after closing.
Schedule A of the commitment identifies the property by legal description, states the current record owner (which should match the seller identified in the purchase agreement), and identifies the proposed insured (the buyer and, where applicable, the buyer's lender). The legal description in Schedule A must be verified against the deed, the survey, and any other legal documents that reference the property to ensure consistency. Discrepancies in the legal description among these documents are a common title issue that must be corrected before closing, because an inconsistent legal description can create uncertainty about the exact parcel being conveyed.
Schedule B-I lists the requirements that must be satisfied before the title company will issue the policy. These typically include recording the conveyance deed from seller to buyer, paying off any existing mortgages or deeds of trust shown as encumbrances on title, providing evidence of the seller's authority to convey (such as a corporate resolution or operating agreement for an LLC), and resolving any specific outstanding items identified by the title examiner. The buyer's counsel should review the Schedule B-I requirements early in the diligence process to identify any requirements that may take time to satisfy, such as obtaining payoff letters from lenders, resolving probate proceedings, or correcting prior deed deficiencies.
Schedule B-II Exceptions: Parsing What Stays With the Land
Schedule B-II contains the substantive risk information in the title commitment. Each exception listed in Schedule B-II represents a matter that the title insurance policy will not cover. Some exceptions are standard boilerplate that appears in virtually every commitment; others are property-specific and require individual analysis.
Standard exceptions include general real estate taxes not yet due and payable, rights of parties in possession not shown by the public record, facts that a survey would disclose, liens arising from labor or materials furnished to the property not yet of record, and easements or claims of easements not shown by the public record. Many of these standard exceptions are deletable or modifiable with the right documentary evidence. The survey exception is typically deleted when the buyer provides an updated ALTA/NSPS survey that the title company reviews and accepts. The mechanic's lien exception can be modified with lien waivers from contractors who performed recent work on the property. The rights-of-possession exception can be modified with a review of current leases and occupancy arrangements.
Specific exceptions are the most important items for M&A buyers to analyze. These include recorded easements for utility companies, pipeline operators, or adjacent landowners; recorded covenants, conditions, and restrictions imposed by prior developers or governmental entities; recorded mechanic's lien claims for specific contractors; prior deeds of trust that are not yet released of record; and any specific conditions noted by the title examiner as a result of the title search. The buyer's counsel should request and review copies of all documents underlying the specific exceptions to determine their substantive impact. An easement for a power line across the back of a large industrial parcel may be immaterial to the buyer's use. A building restriction covenant that prohibits structures within 50 feet of the property boundary may prevent a planned expansion. A prior unreleased deed of trust may indicate a prior mortgage that was never properly discharged. Each exception requires individual assessment before the buyer can determine whether it is acceptable, renegotiable, or a deal issue.
Gap Indemnities and Closing Title Mechanics
The gap period in a real estate closing is the interval between the date on which the title commitment is issued (based on a title search current as of a specific date) and the date on which the deed and other closing documents are recorded with the county recorder's office. During the gap period, new encumbrances can be recorded against the property: a contractor might file a mechanic's lien for work that was completed before the title search date but not yet recorded, a judgment against the seller might be docketed, or the seller might record an unauthorized encumbrance. These post-commitment, pre-recording items would not appear in the title commitment and could adversely affect the buyer's title even if the recording is completed the same day as closing.
A gap indemnity is the seller's agreement to indemnify the buyer against any loss arising from encumbrances that are recorded against the property during the gap period between the commitment effective date and the recording of the closing documents. Some title companies provide gap coverage as part of their commitment, effectively insuring against gap period encumbrances in their policy. Where gap coverage is not available from the title company, the buyer's counsel should negotiate a gap indemnity from the seller in the purchase agreement or in a separate indemnity delivered at closing. The gap indemnity should cover not only items that the seller recorded or caused to be recorded, but also items recorded by third parties (such as judgment creditors or mechanics' lienors) whose claims arise from pre-closing activity.
In many transactions, particularly those involving lender financing, the title company facilitates a simultaneous issue in which the owner's policy (insuring the buyer) and the loan policy (insuring the buyer's lender) are issued simultaneously based on the same title search. This eliminates any timing gap between the owner's coverage and the lender's coverage and is standard practice for transactions involving acquisition financing.
ALTA/NSPS Survey: Access, Easements, and Encroachments
The ALTA/NSPS survey is the physical counterpart to the title commitment. Where the title commitment reveals what has been recorded in the public record about the property, the survey reveals what actually exists on the ground: the precise location of the boundary lines, the location of all buildings and improvements, the location of recorded easements relative to the improvements, any encroachments onto or from adjacent properties, and the relationship of the property to public roads and access points.
Access to a public road is a fundamental property right that must be confirmed through the survey. A property without legal access to a public road may be landlocked, with access only through easements across neighboring properties. The survey should confirm that the property has direct frontage on a dedicated public road or that a recorded access easement provides legally enforceable access. The scope and condition of any access easement matters as much as its existence: an easement that permits pedestrian access only, or that permits access only during daylight hours, may not satisfy the operational requirements of a manufacturing or distribution facility. The M&A buyer's counsel should review the full text of any access easement identified on the survey to confirm it is adequate for the business's current and anticipated operations.
Encroachments are one of the most common survey findings and require careful evaluation. An encroachment occurs when a structure or improvement is located outside the property boundary (encroaching onto a neighbor's land or into a recorded easement area) or when a neighboring structure encroaches onto the subject property. Minor encroachments (a fence line that is a few inches off the boundary) may be resolvable through a boundary line agreement with the neighbor. Significant encroachments (a building that sits partially on a neighbor's land, or an improvement that encroaches into a utility easement area) may require physical relocation of the improvement, a written consent from the easement holder or neighbor, or title insurance coverage through a special endorsement. The buyer's counsel must identify each encroachment noted on the survey, assess its severity, and determine whether it can be resolved before closing or must be accepted as a known condition.
Zoning Compliance: Letters, Certificates of Occupancy, and Expansion Rights
Zoning compliance verification confirms that the property's current use is lawfully permitted under the applicable zoning ordinance and that the improvements on the property comply with applicable use, dimensional, and parking requirements. In M&A transactions involving operating businesses with owned real estate, zoning compliance is relevant both to the current use and to any anticipated expansion or change in use the buyer plans after closing.
A zoning compliance letter (also called a zoning certificate or zoning verification letter) is a written statement from the local zoning or building department confirming the property's current zoning classification, the permitted uses in that zoning district, and whether the property's current use is a lawful permitted use, a lawful nonconforming use, or a use that requires a variance or special use permit. Buyers should request a zoning compliance letter from the applicable municipality as part of standard property diligence. Processing times for zoning letters vary widely by municipality, and in some jurisdictions the municipality will only confirm current zoning without verifying use compliance. Where the municipality will not issue a zoning compliance letter, the title insurance company may provide zoning coverage through an ALTA 3 endorsement that insures against loss resulting from certain types of zoning noncompliance.
A nonconforming use or structure is one that was lawfully established under prior zoning regulations but no longer conforms to current zoning requirements because the zoning ordinance changed after the use or structure was established. Nonconforming uses are typically permitted to continue but face significant restrictions: they may not be expanded, intensified, or extended; if the nonconforming use is discontinued for a defined period, the nonconforming status may be lost; and if the nonconforming structure is substantially damaged, it may not be rebuilt to the prior nonconforming configuration. For a buyer planning to expand or modify operations at the facility, a nonconforming use status can be a significant constraint that must be analyzed before committing to the deal.
The certificate of occupancy (CO) confirms that the building, as constructed, was approved by the local building department for its current use. Buyers should verify that a valid CO exists for each building on the property and for any subsequent alterations or additions. A missing CO for an existing structure can create complications if the buyer later seeks permits for renovations or if the municipality conducts a compliance inspection. Some municipalities issue temporary certificates of occupancy that expired without being converted to permanent certificates, leaving an apparent compliance gap in the property's permit history.
Phase I ESA Scope and Recognized Environmental Conditions
The Phase I Environmental Site Assessment is the standard environmental diligence tool for commercial real estate transactions and is a routine component of M&A diligence when the target company owns real property. The Phase I ESA is conducted under ASTM Standard E1527-21, which was updated in 2021 to clarify several areas including the treatment of vapor intrusion as a pathway for recognized environmental conditions and the scope of the historical records review.
The Phase I ESA process begins with a review of federal, state, and local regulatory databases to identify whether the property or adjacent properties appear on any lists of known contaminated sites, reported spills, underground storage tanks, or environmental enforcement actions. The most commonly referenced databases are maintained by the EPA (CERCLIS, RCRA, TRI), state environmental agencies, and local fire departments (UST registrations). A property that appears on a state voluntary cleanup program list, for example, may be under an active remediation program with ongoing obligations that will transfer to the buyer.
The historical records review uses aerial photographs, fire insurance maps (Sanborn maps), topographic maps, and chain of title review to identify prior uses of the property and adjacent properties that may have resulted in contamination. Aerial photograph review is particularly valuable for industrial properties, because it can reveal the presence of prior above-ground storage tanks, waste disposal areas, or industrial processes that were removed before the current owner acquired the property but that left contamination in the soil. The site reconnaissance involves a visual inspection of the property, including accessible interior and exterior areas, and inspection of adjacent properties from the property boundary. The environmental professional looks for visual indications of contamination (stained soil, stressed vegetation, unusual odors, distressed or deteriorating tanks or drums) and confirms that the site conditions match the historical records review.
A recognized environmental condition (REC) is the Phase I ESA's core output: a condition that indicates or suggests a reasonable possibility of a release of hazardous substances that may have a material effect on the property. RECs are classified as current, historical, or controlled. A controlled REC is a condition that has been addressed under a regulatory cleanup program but where institutional controls (deed restrictions, groundwater monitoring requirements) remain in place. All RECs must be clearly identified in the Phase I report and evaluated for their potential significance. A single REC from a prior underground storage tank can be a minor administrative resolution or a major contamination issue, depending on whether the tank was removed under regulatory oversight, whether soils were sampled, and whether groundwater was affected.
Phase II Decisions and In-Place Groundwater Conditions
The decision to proceed to a Phase II ESA after a Phase I report identifies RECs is one of the most consequential decisions in real property M&A diligence. Phase II sampling and analysis can confirm that the REC does not represent actionable contamination above regulatory thresholds, or it can confirm significant contamination that requires formal remediation, affects property value, and may trigger seller obligations or deal renegotiation. The cost of a Phase II, while real, is typically modest relative to the transaction value and the potential liability exposure of acquiring a contaminated property without confirming the extent of contamination.
A Phase II ESA involves physical sampling of soil, soil vapor, or groundwater at locations selected by the environmental professional based on the Phase I findings. Samples are analyzed at a certified laboratory for the specific contaminants of concern identified in the Phase I report (petroleum hydrocarbons, chlorinated solvents, heavy metals, pesticides, or others). The results are compared against the applicable state regulatory standards, which vary by state and by the proposed use of the property (residential versus commercial versus industrial standards). A result that exceeds regulatory thresholds for the proposed use triggers an obligation to notify the state environmental agency in most jurisdictions, which may lead to a formal investigation, a cleanup order, or enrollment in a voluntary cleanup program.
In-place groundwater contamination is among the most complex environmental conditions encountered in M&A diligence, because groundwater contamination is typically not confined to the property boundaries and may extend to neighboring properties or public water supply wells. The remediation of groundwater contamination can be expensive, time-consuming (often years or decades), and uncertain in outcome. When Phase II sampling confirms groundwater contamination above regulatory standards, the buyer must assess the estimated remediation cost, the likely regulatory pathway, the availability of state environmental cleanup fund reimbursement (which many states offer for petroleum-related groundwater contamination from registered USTs), and the impact on the property's use during the remediation period. These factors should inform purchase price adjustment negotiations and the scope of the seller's environmental indemnification in the transaction documents. For a broader view of how environmental representations and indemnities are structured in M&A, the M&A due diligence guide addresses environmental risk allocation in the purchase agreement.
Property Tax Abatements, TIF Agreements, and Economic Development Obligations
Property tax incentives and economic development agreements are frequently associated with industrial, manufacturing, and commercial real estate and can represent significant ongoing obligations or benefits that transfer to a buyer in an M&A transaction. The diligence required for these arrangements goes beyond confirming the current tax assessment; it requires understanding the legal framework of each incentive, the obligations attached to it, and the consequences of the change of ownership.
Property tax abatements are granted by local governments, typically through industrial development authorities, downtown development authorities, or general local government authority under state enabling legislation. The abatement agreement specifies the property subject to the abatement, the duration of the abatement period, the percentage of assessed value exempt from taxation during the abatement, and the commitments the property owner must maintain to receive the abatement benefit (employment levels, capital investment amounts, continued industrial use). The buyer must obtain and review the complete abatement agreement and any amendments, confirm that all commitments are currently being satisfied, and determine whether the change of ownership requires prior consent from the granting authority or triggers any clawback of previously abated taxes.
Economic development grants, forgivable loans, and job creation incentives are frequently associated with property acquisitions in enterprise zones, designated development areas, or rural opportunity zones. These grants may have been received years before the M&A transaction and may still carry ongoing obligations that attach to the property or the business at the site. The purchase agreement should include representations from the seller confirming the status of all economic development agreements, confirming that all obligations are current and in compliance, and indemnifying the buyer for any recapture claims arising from pre-closing noncompliance.
Mineral Rights, Riparian Rights, and Subsurface Interests
Mineral rights and riparian rights are property interests that are frequently overlooked in M&A diligence but can materially affect the value and use of real property, particularly for properties in oil and gas producing regions, agricultural areas, or near water bodies.
Mineral rights refer to the ownership of oil, gas, coal, metals, and other minerals beneath the surface of a parcel of land. In many parts of the United States, mineral rights were severed from surface rights decades or centuries ago and are held by different owners. A surface owner who does not own the mineral rights beneath the property can have limited ability to prevent mineral extraction activities from occurring on or beneath the property, subject to state law requirements for notice and surface use compensation. In states with active oil and gas production (Texas, Oklahoma, Pennsylvania, Ohio, Michigan, West Virginia, North Dakota), the presence of severed mineral rights and active oil and gas leases must be investigated as part of property diligence. The title commitment should be reviewed for any reservation of mineral rights or recorded mineral leases, and the survey should note any surface use agreements, well locations, or pipeline easements associated with mineral extraction.
Riparian rights govern the use of water adjacent to or flowing through a parcel of land and vary significantly by state. In states following the riparian doctrine (generally eastern states), the owner of property adjacent to a water body has certain rights to use the water, and these rights may be a valuable attribute of the property (for irrigation, industrial water use, or recreational purposes) or may impose obligations on the property owner (floodplain maintenance, bank stabilization). In states following the prior appropriation doctrine (generally western states), water rights are separate from land rights and must be separately investigated and transferred. The buyer of property with associated water rights must determine whether the water rights are appurtenant to the land (transferring automatically with the property) or are separately held water rights that require a separate conveyance.
Mechanic's Liens, Unpaid Contractors, and Pre-Close Construction
Mechanic's liens are statutory liens that contractors, subcontractors, materialmen, and design professionals can record against real property to secure payment for labor or materials furnished for improvements to the property. The mechanic's lien statutes of most states permit a lien to be recorded within a defined period after the last date work was performed or materials were furnished, which means that a lien can be recorded after closing for work that was completed before the closing date if the contractor was not paid before the lien filing period expired.
In M&A transactions where the target company has recently completed or is in the process of completing construction or renovation work on its owned real property, the mechanic's lien risk is a specific and identifiable concern. The buyer's diligence should include a review of all construction contracts, subcontracts, and supplier agreements related to recent construction activity, confirmation of payment status for each contractor and supplier through lien waivers or sworn statements of payment, and confirmation from the general contractor of the date of substantial completion (which often starts the lien filing period running).
Lien waivers are written statements from contractors and suppliers confirming that they have been paid for their work and waiving their right to file a mechanic's lien for that work. Two types are standard: a conditional lien waiver waives the lien right conditioned on the receipt of a specified payment; an unconditional lien waiver waives the lien right without any condition. The title company will typically require unconditional lien waivers from all general contractors and major subcontractors before removing the mechanic's lien exception from Schedule B-II. The buyer's counsel should identify all contractors and suppliers who might have lien rights on the property and ensure that appropriate waivers are collected before closing. For properties where recent construction is ongoing at the time of the M&A transaction, the parties should consider whether title insurance mechanic's lien coverage is available and at what premium.
Landmark, Historic, Wetlands, and Floodplain Restrictions
Regulatory restrictions imposed by environmental, historic preservation, and land use authorities can significantly constrain a buyer's ability to modify, expand, or redevelop an acquired property. These restrictions may not appear in the title commitment if they are imposed by governmental authority rather than recorded as private covenants, making regulatory review an essential complement to title and survey diligence.
Historic landmark designations at the federal, state, or local level restrict the property owner's ability to alter or demolish structures that have been identified as historically significant. Federal historic designation under the National Register of Historic Places does not by itself restrict private property owners, but it may affect eligibility for federal historic tax credits and may trigger Section 106 review requirements for any federally funded or licensed projects affecting the property. Local landmark designations are typically more restrictive: a locally designated landmark may require approval from a historic preservation commission for any exterior alteration, demolition, or new construction on the property, and approvals can be delayed, conditioned, or denied. The buyer planning to renovate, expand, or demolish any portion of the improvements should investigate whether any historic designation applies before committing to the deal.
Wetlands and floodplain designations are federal and state regulatory restrictions that can constrain development and impose ongoing compliance obligations. Federal wetland jurisdiction under Section 404 of the Clean Water Act was clarified by the Supreme Court's 2023 decision in Sackett v. EPA, which narrowed the definition of waters of the United States subject to federal jurisdiction. However, many states have adopted wetland regulations that are broader than the federal standard, and state-law wetland protections may apply even where federal jurisdiction is absent. The buyer of any property with potential wetland features (marshy areas, seasonal flooding, hydrophytic vegetation, proximity to water bodies) should include a wetland delineation in the diligence scope if a recent delineation is not already available. A current delineation is particularly important if the buyer plans any construction, grading, or fill activities post-close.
Floodplain designation affects properties within FEMA's mapped Special Flood Hazard Areas (SFHAs). Properties in Zone A or AE require flood insurance as a condition of federally backed mortgage financing, and any construction in an SFHA requires a FEMA floodplain development permit and must meet elevation and construction standards designed to minimize flood damage. For M&A transactions financed with bank loans or other lender financing, the buyer's lender will typically require a current flood zone determination as part of the loan closing process. The ALTA/NSPS survey should include a note indicating the flood zone classification based on FEMA mapping.
Title Insurance Owner's Policy Endorsements and Timing with Other Diligence Streams
The title insurance owner's policy issued at closing protects the buyer against loss resulting from title defects, liens, and encumbrances that are not disclosed in the policy's Schedule B exceptions. The base policy form provides broad coverage for matters arising from the public record and from forgery, fraud, and similar risks. Endorsements expand or modify that base coverage to address specific risks identified in the diligence process or required by the buyer's lender.
Key endorsements for M&A transactions involving owned real property include: the ALTA 3 zoning endorsement, which insures against loss resulting from a governmental order requiring removal or remedy of a structure because it violates current zoning, and against loss if the property is not currently used for a permitted use; the ALTA 9 endorsement, which insures against encroachments, easement violations, and building setback violations disclosed by the survey; the ALTA 17 access and entry endorsement, confirming legal vehicular access to a public road; the ALTA 28 easement damage endorsement, covering physical damage to improvements from the exercise of rights under a recorded easement; and the ALTA 35 mineral and other subsurface substances endorsement, which insures that mineral extraction activities will not physically damage surface improvements or interfere with the owner's use of the surface. Lender's policies require additional endorsements specified by the lender, including ALTA endorsements 4 (condominium), 6 (variable rate), 13 (leasehold), and others depending on the transaction structure.
Coordinating the real estate diligence timeline with the broader M&A diligence process is a consistent challenge in transactions involving owned property. Title search and commitment issuance typically takes two to four weeks from order to delivery. ALTA survey production takes two to six weeks depending on the surveyor's workload and the complexity of the property. Phase I ESA preparation under ASTM standards takes three to four weeks from fieldwork to final report. Phase II sampling and laboratory analysis adds additional time that can range from weeks to months depending on the complexity of the sampling program and laboratory turnaround. All of these timelines must be mapped against the M&A closing schedule from the outset, with orders placed as soon as the letter of intent is signed and access to the property is granted. Buyers who treat real estate diligence as a secondary track that begins only after business diligence is substantially complete typically find themselves either closing with outstanding property diligence items or extending the closing timeline to accommodate real estate deliverables. See the broader M&A due diligence guide for framework on coordinating parallel diligence tracks, and the sale-leaseback guide for the real estate structuring decisions that often follow the completion of property diligence. For questions about how these diligence findings affect purchase price and representations and warranties, the M&A transaction services at Acquisition Stars address how real property risk is allocated in the transaction documents.
Frequently Asked Questions
What is a title commitment and what should the M&A buyer examine in Schedule B-II?
A title commitment is the title insurance company's preliminary report on the state of title to a parcel of real property, issued before closing as the basis for a title insurance policy. The commitment identifies the insured (usually the buyer and its lender), the amount of coverage, and two schedules of exceptions. Schedule A sets out the legal description of the property and the current vesting of title. Schedule B-I lists requirements that must be met before the title company will issue the policy, such as payment of existing mortgages, delivery of deeds, and resolution of outstanding liens. Schedule B-II lists the exceptions from coverage: matters that the title insurance policy will not insure against. In M&A due diligence involving owned real property, Schedule B-II is where the substantive analysis is concentrated. Schedule B-II typically includes standard exceptions (general taxes not yet due, rights of parties in possession, matters disclosed by a current survey) and specific exceptions listed for the particular property. Specific exceptions might include easements for utilities or access, restrictive covenants, encroachments disclosed by a prior survey, mechanic's lien claims, or unrecorded claims of adjoining owners. Each specific exception must be reviewed to determine whether it materially affects the property's value, the buyer's intended use, or the ability to finance the property. Some exceptions are deletable: the title company will remove them from Schedule B-II if the buyer provides a current ALTA survey, a lien waiver, or other satisfactory evidence. Others are permanent exceptions that run with the land and cannot be insured away. The buyer's counsel should prepare a written exception review summarizing each Schedule B-II item, its significance for the transaction, and whether deletion or endorsement is available.
What are the ALTA/NSPS survey standards and why does M&A due diligence require an updated survey?
The ALTA/NSPS Land Title Survey standards, jointly published by the American Land Title Association and the National Society of Professional Surveyors and most recently updated in 2021, define the minimum requirements for a survey that is acceptable to title insurance companies as the basis for deletion of the survey exception from Schedule B-II of the title commitment. An ALTA/NSPS survey must be prepared by a licensed surveyor, must show the property boundaries with metes and bounds, must locate all improvements (buildings, structures, parking areas) on the property, must identify all visible easements, encroachments, and rights-of-way, and must include a certification by the surveyor to the buyer, buyer's lender, and title insurer. The 2021 standards include a table of optional items (Table A items) that the buyer or lender may request in addition to the minimum requirements, including flood zone determination, location of utilities, gross building area, parking count, and setback lines. An updated survey is required in M&A diligence involving owned real property for several reasons. Prior surveys may be outdated, failing to reflect improvements, easements, or encroachments that were added after the prior survey date. Lenders providing acquisition financing almost universally require an updated ALTA/NSPS survey meeting current standards as a condition of their commitment. The title insurer needs the current survey to delete the survey exception from Schedule B-II. And the buyer needs the survey to assess whether the property can accommodate its intended use, whether any improvements encroach on easements or setback lines, and whether there are access or frontage issues not apparent from the title commitment alone.
What is a Phase I ESA and what triggers the decision to proceed to Phase II?
A Phase I Environmental Site Assessment is a standardized review of a property's environmental condition conducted in accordance with ASTM Standard E1527-21, the current governing standard for Phase I ESAs. The Phase I ESA is performed by a licensed environmental professional and involves a review of historical records (aerial photographs, fire insurance maps, regulatory databases, chain of title) to identify prior uses that may have resulted in contamination, a site reconnaissance to visually inspect the property and adjacent properties for recognized environmental conditions (RECs), interviews with current and former owners or operators, and a regulatory database search for records of environmental enforcement actions, underground storage tanks, and known contamination. The Phase I ESA does not involve sampling or testing of soil or groundwater. Its purpose is to identify RECs: conditions that indicate or suggest a reasonable possibility of a release of hazardous substances at the property that may have a material effect on value or intended use. A Phase II Environmental Site Assessment involves actual sampling and laboratory analysis of soil, soil vapor, groundwater, or building materials to characterize the nature and extent of any contamination suggested by the Phase I findings. The decision to proceed to Phase II is triggered when the Phase I ESA identifies one or more RECs that create material uncertainty about the property's environmental condition. A buyer should also consider Phase II when the property's prior uses (gas stations, dry cleaners, industrial manufacturing, auto repair, agriculture with pesticide applications) are inherently likely to have caused contamination even if no specific RECs are identified. Phase II results can range from no actionable contamination above regulatory thresholds to significant contamination requiring formal remediation under state environmental agency oversight, which can materially affect property value and the feasibility of the transaction.
How does property tax abatement transfer in an M&A transaction?
Property tax abatements are agreements between a local government authority and a property owner that reduce or eliminate real property tax assessments for a defined period, typically in exchange for capital investment, job creation commitments, or economic development activity. In an M&A transaction involving owned real property, the buyer must determine whether any applicable tax abatement will survive the change in ownership and remain in effect post-closing, or whether the change of control triggers a termination, recapture, or reassessment of the abatement. The terms of abatement survival depend entirely on the specific abatement agreement and the enabling legislation under which it was granted. Some abatements run with the land and automatically transfer to a new owner, provided the new owner continues to use the property for the qualifying purpose. Others are personal to the original grantee and terminate upon a change in ownership, potentially triggering clawback of previously abated taxes. Still others require prior notice and consent from the granting authority before any change of control, which means the M&A transaction may require government approval as a condition of closing. The buyer's diligence should include a full review of the abatement agreement, the applicable legislation, and any administrative regulations governing transfer. The seller should represent in the purchase agreement that all obligations under the abatement agreement are current and in compliance, and should indemnify the buyer for any recapture claims arising from pre-closing noncompliance. If the abatement cannot survive the transfer, the buyer should request a price adjustment reflecting the present value of the lost tax benefit.
What are TIF agreements and how do they affect an M&A transaction?
Tax Increment Financing (TIF) districts are economic development tools used by local governments to fund public infrastructure improvements by dedicating the incremental increase in property tax revenues (the 'tax increment') generated by development within a defined district to repaying the bonds or obligations issued to fund the public improvements. When a target company's owned real estate is located within a TIF district, the M&A buyer must analyze the TIF agreement and understand how the TIF obligations interact with the property and the business. TIF obligations most commonly affect the property through assessments or special charges that the local government imposes on properties within the district to service TIF debt. These assessments may run with the land and transfer to a buyer, creating an obligation that the buyer must service in addition to ordinary real property taxes. The TIF agreement may also impose development, use, or employment commitments on the property owner that would transfer to the buyer and restrict the buyer's ability to change the property's use or reduce employment at the facility. In some TIF agreements, the property owner has received grants or forgivable loans tied to employment or investment commitments, and a change of ownership may trigger recapture of those grants if the commitments are not met post-closing. Diligence on TIF obligations requires reviewing the TIF plan, the TIF development agreement, any special assessment ordinances applicable to the property, and correspondence between the property owner and the TIF administrator. The purchase agreement should include representations that all TIF obligations are current and should allocate responsibility for pre- and post-close TIF obligations and recapture exposure.
What title insurance endorsements are most important for M&A transactions involving owned real property?
Title insurance endorsements are additions to the standard owner's or lender's policy that provide coverage for specific risks not covered by the base policy form. In M&A transactions involving owned real property, several endorsements are routinely negotiated and should be considered for any transaction. The ALTA 3 endorsement (zoning) provides coverage against loss resulting from a final government order requiring the insured to remove or remedy a structure because it violates applicable zoning ordinances, and against loss if the property's use is not permitted by current zoning. The ALTA 6 endorsement (variable rate mortgage) and ALTA 9 endorsement (restrictions, encroachments, minerals) address encroachment risk and mineral rights. The ALTA 14 endorsement (future advance) is relevant when additional draws under a credit facility may occur post-closing. The ALTA 17 endorsement (access and entry) insures that the property has legal access to a public street or highway. The ALTA 22 endorsement (location) insures the legal description against inconsistency with the survey. The ALTA 28 endorsement (easement damage) provides coverage for physical damage to improvements resulting from the exercise of rights under a recorded easement. The ALTA 35 endorsement (mineral and other subsurface substances) is critical for properties in areas with active oil, gas, or mineral extraction activity, insuring that extraction activities will not physically damage the improvements or interfere with surface use. The specific endorsements appropriate for a given transaction depend on the property type, location, intended use, and the exceptions and conditions identified in the title commitment. Buyers should work with title counsel to identify all applicable risks and negotiate the corresponding endorsements before closing.
How does the Phase I ESA gap period work and what is a gap indemnity?
The Phase I ESA gap period refers to the interval between the date on which the environmental professional's site reconnaissance and research are completed (the effective date of the report) and the date on which the property transaction actually closes. ASTM Standard E1527-21 provides that a Phase I ESA has a shelf life of 180 days: a report prepared more than 180 days before the transaction closing date does not satisfy the ASTM standard and does not provide the statutory innocent landowner defense protection available under CERCLA. In transactions with extended timelines between Phase I completion and closing, the buyer faces a gap during which new environmental conditions could develop at the property or adjacent properties without being captured in the Phase I report. A gap indemnity addresses this risk by requiring the seller to indemnify the buyer for environmental conditions that arise or are discovered during the gap period between the Phase I effective date and the closing date. The gap indemnity is distinct from the broader environmental representations and indemnities in the purchase agreement and specifically addresses the temporal gap in Phase I coverage. Buyers in transactions where the gap period exceeds 90 to 120 days should also consider requesting a Phase I update from the environmental professional, which involves a less comprehensive review of the property and database records for changes that occurred since the original report date. Whether an update suffices or a full new Phase I is required depends on the elapsed time, any changes in property use or adjacent activity, and the buyer's risk tolerance.
What wetlands, floodplain, and landmark restrictions commonly arise in M&A property diligence?
Wetlands, floodplain, and landmark or historic designations are regulatory restrictions that attach to real property and can materially limit the buyer's ability to modify, expand, or redevelop the facility after the acquisition. Federal wetlands regulation under Section 404 of the Clean Water Act requires a permit from the Army Corps of Engineers for dredge and fill activities in waters of the United States, including many wetland areas. Properties with wetlands on site or adjacent to the site face restrictions on any construction, grading, or fill activities that would affect the wetland area. Wetland delineation (the process of mapping the precise boundaries of protected wetland areas) is not always current for properties held for long periods, and the wetland boundaries can shift over time as vegetation and hydrology change. Buyers contemplating expansion or redevelopment should commission a current wetland delineation to confirm that the planned activities do not require Section 404 permits. Floodplain designation by FEMA's National Flood Insurance Program affects whether the property is in a Special Flood Hazard Area (SFHA), which determines flood insurance requirements for mortgage lenders and the property's vulnerability to flood events. The ALTA/NSPS survey should include a flood zone determination. Properties in SFHA Zone A or Zone AE require flood insurance as a condition of federally backed financing and face significant development restrictions. Historic or landmark designations by local, state, or federal authorities restrict the property owner's ability to alter or demolish structures that have been designated as historic resources, and may require approval from a historic preservation commission for any exterior changes. The presence of a historic designation is typically reflected in the title commitment as a specific exception, and buyers should investigate the scope of the designation and any pending landmark proceedings before closing on properties with potentially historic structures.
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