In case you missed it, the City of Dallas purchased an office building at 7800 Stemmons Freeway in September 2022. The intentions were good, but the due diligence was not. The result was millions of wasted dollar of taxpayer money and a call for development of policies and procedures to avoid a similar disaster in the future.

In 2022, in Dallas, Texas, getting a building permit was an exercise in patience. The department was understaffed, there was a significant software upgrade going on, and a lot of permits were requested. Remember, the pandemic was winding down and remodel and construction activities, especially in the residential sector, were doing the opposite. It was a busy department, with long wait times for those permits.

Dallas wanted to put the entire permitting office in once place, as a one-stop shop, in order to expedite those permit times. With that goal in mind, the purchase of the building at 7800 Stemmons Freeway was completed. The city did SOME due diligence, but didn’t have a process in place, or sufficient expertise, so the inspections on the commercial real estate asset were cursory instead of in-depth. The city knew there was a significant remodel to the building was needed, but they didn’t understand HOW significant. They got started, and moved some employees into the building at the end of 2023. Those same employees were moved back out in 2024, due to the fact that they couldn’t work safely in the building. The irony that the permitting office could not issue a certificate of occupancy for a city-owned building is not lost here.

The city wanted to purchase the building, and create a one-stop shop for its permitting process and move through the backlog in its office. It commissioned help from a reputable commercial real estate company to create a report about the condition of the building it wanted to acquire. Apparently, the report, like so much of this process, was ad hoc. As of the date of this article, the city owns about 5800 buildings, but there’s no comprehensive management systems for those already in the portfolio or any new properties.

After review, the report itself doesn’t seem bad, but it is incomplete. It’s a surface-level overview of the condition of the building- it notes work to major building systems are necessary, but it doesn’t go into any useful detail about the extent of that work. Building systems are absolutely critical to operations of a commercial real estate asset, and can be extremely expensive, for code compliance as well as the repair or replacement itself.

The commercial real estate company that was hired did what it was hired to do. There were many major building deficiencies identified. These include, but are not limited to, heating, ventilation, and air conditioning (HVAC) systems, electrical, and plumbing, and Americans with Disabilities compliance issues. Fire code and other safety issues were also noted. It was additionally determined that there wasn’t enough parking available for the anticipated employees, visitors and fleet vehicles, either. These problems were so extensive that the building couldn’t be safely occupied by employees of the City of Dallas.

The City of Dallas did not have a clear process or project plan to gather relevant information about the building, quantify the risk of buying and remodeling it, and did not even have a good idea about what it was buying before the transaction closed! The city never received disclosure from the seller, so it’s unlikely there is any sort of recourse against the previous owner.

In commercial real estate transactions, due diligence is key . In residential transactions, there are consumer protections and laws about disclosures, the condition of the building, etc. In commercial real estate, it’s presumed that the transaction is between sophisticated parties, who understand the importance of evaluating the asset before the purchase takes place, instead of just taking the word of the seller about the condition of the building. If this had been a residential transaction, the result might have been a little different. In this case, it’s truly buyer beware.

The City of Dallas has already determined that there needs to be a process in place for future real estate acquisitions by the city. The city wants to create policies and procedures for real estate transactions, and also wants to have a plan in place for long-term portfolio management and future real estate acquisitions. There are also plans to use an experienced real estate company for support. Ideally, that company will perform complete due diligence, and not just a limited review which indicates repairs are needed to commercial real estate. Having the true scope of the repairs is vital to an informed and successful commercial real estate transaction.

About $29 million later, and still counting, the city determined that it couldn’t issue a permit to occupy its own building. There were attempts at a remodel, but the scope was simply beyond what the city was willing to do. It’s also costing about $73,000 per month to maintain a building that can’t be occupied. To date, the building has been sitting vacant for over 2 years. Recently, Dallas finally determined that this transaction was “a failure” and has decided that the building needs to be sold. Additionally, the current city manager suspended real estate purchases that haven’t been approved by the council or voters. (The purchase of the 7800 Stemmons Freeway building was made under the auspice of a different city manager.)

If the building can’t be sold, then I think that the building will be demolished and sold for the land alone. The zoning in the area is mixed-use, so there might be opportunities for a variety of developments, including affordable housing units.

And that one-stop shop for the permitting department? All of that is going to be available online now, so there’s no need to come into the office to get it. Commercial construction permitting times are now down by 50%.

Due diligence and understanding the scope of acquisitions is vital in commercial real estate transactions. An experienced real estate lawyer can assist in evaluating and protecting those assets.

Check out lawbyjz.com for more information.

#commercialrealestate #realestatepurchase #duediligence