Ok REIN members, looking for some creative ideas

[MarkTorgerson]

I have a bit of a dilema and I could use some creative thinking.
I have an accepted offer on a large commercial building. The building has been in place for 30 years and has great long term tenants. It is in fanatastic condition and I am getting it at a significiant discount. I also have partners that would be willing to put up the cash down and they are able to qualify.
So where is my dilema you ask??
The problem is that 30 years ago there was a gas station on this lot. The tanks were removed but the guidelines back then are not nearly as tight as they are now. There was a Phase 2 study done and there is evidence of hydrocarbons on one of the boreholes. What this basically means is that a financial institution wont finance this property until it has a clean bill of health and the property is cleaned up. This would also mean that I would have to come up with the full amount to pay the seller directly. The tenants don`t care about any hydrocarbons, there is no health risk within the building, the building has been there 30 years without issue. This deal is too good to walk away from. It is showing a Cap Rate of 11% with the current purchase price. My partners are willing to put up the cash down but no more. The vendors are highly motivated but will most likely not take a VTB as they are old and want out.
Any creative ideas from you bright REIN members to make this work?


Mark T

 

[HeatherShadlock]

My suggestion to you would be this: if the vendors are motivated then I would right it in the deal that the vendors are responsible for a clean phase II environmental. Most anyone else that approaches them to purchase the property would be in the same position as yourself. And they know it. I personally do not believe that any deal is too good to walk away from, especially when there are environmental issues involved. If you purchase the property outright and do not have it cleaned up....if the contamination leaches across to another property, if may be able to be linked back to you. And then you are liable for that as well. All environmentals assess the surrounding property and that is now part of its perminant record. As well, if you are ever in a position to sell, you will need to have a clean environmental. What was your divorce plan? Sometimes the total extent of contamination is not determined until they dig everything up. Do you know if the tanks were ever removed?? I believe that there are grants that can be had to help with this type of clean up.
I would say, get it resolved now before you bring money partners into that mess. Remember to take the emotion out of it and look at the facts.

 

[mikecunning]

Here is my two cents...it does not matter how good a deal it is...this deal could bankrupt you! RUN AS FAST AS YOU CAN...there will be another deal right around the corner.

The reason it`s 11 Cap and below market value is because of the potential contamination...redmediation is an EXTREMELY expensive operation...how would they remediate the soil below with the building still standing above???? Single Family homes with oil tanks cost upwards of $100k to clean up...I`ve heard of commercial remediations around $400K-$500k but this could be even more expensive...

AS the owner of the property, if there is also contamination on adjoining properties you could be responsible to clean that up as well!!!

Life is too short...so what if it`s a good deal...it doesn`t matter...do not take the risk...if the Seller can provide a clean bill of health then you might want to consider it...otherwise RUN AS FAST AS YOU CAN!!!!

 

[Kimberly]

I concur. I deal with automotive retailers in my day job, and Mike is right... I`ve sat across from such business owners where cleanup on commerical properties have easily cost them and sometimes their insurance companies $500,000+...plus months upon months of time, not to mention the aggrevation of dealing with the city, government enviornmental agencies, insurance companies and neighbours (who want to ensure you havent affected their properties). Removal of the soil is very very expensive as its an enviromental toxic substance and very few sites take it. You mention the bank not going near such a purchase - I know they are very risk averse - I`m sure they have a lot of experience under their belts of like properties and they don`t want to take on any others - notice how the lenders make you pay for the environmental studies. The issue is the unknown - and the government puts the current owner financially on the hook 100%. If you find banks challenging at times.... that`s nothing compared to the government on environmental issues - remember I`ve sat across the desk of business owners working through such challenges.

You didn`t mention your insurance company. You may find it impossible to find one to insure you until you get a clean bill of health.
What about the current owners insurance company - maybe they have some responsibility here.

Have you ever driven by a business that seems to have a large hole in the ground, then within weeks notice the hole getting bigger and bigger until it consumes the entire property... that`s the environmental folks at work. What about properties where they are fenced in and have a foot or two of gravel on them that has to sit dormant for many months or years.....yep... environmental.

We had a guest speaker, from an environmental engineering company I believe, at one of the Ontario REIN meetings within the past year, talking about the different levels of environmental testing. Perhaps the REIN team can forward you that presentation and the contact.

Asking the current owners to handle the level 2 environmental assessment and then providing you with a clean bill of health will tell you just how motivated they are, because once they open the Pandora`s box... the process kicks in until it`s cleaned up.

Go in with your eyes wide open...

Kimberly

 

[ToddStokowski]

I agree, I would not close until all the environmental issues are dealt with.

I am glad to see that you were given the answers you needed to hear, not what you wanted to hear.

Maybe there is something we are all missing. I hope so for your sake, but environmental issues can drag on forever and are the responsibility of the owner at the time, not the owner when the contamination occurred.

Best of luck.

Todd

 

[markl]

I liken this to getting a home inspection on a rental property and it turns up a big problem.

Ussually either the current owner takes care of it or you walk away

Regards,

Mark Loeffler
www.homeownersoon.com

 

[RebeccaBryan]

Mark,

You started this thread however have not commented on the advise. You need to not get yourself emotionally attached to any deal. Don`t say you haven``t been warned.

Right Thomas? I am also working on an apartment building deal and have been warned by a member not to do it. That advise has made me proceed with caution and question whether I am doing the right thing. I will make sure I do DUE DILLEGENCE before proceeding removing conditions.

 

[ssteckler]

Mark,

Before I joined REIN I had a career over several years monitoring and remediating contaminated sites in BC. The previous replies were right. You don`t want this deal. Phase 2 investigations are expensive. It can, and probably will, bankrupt you.

There are hydrocarbons found in one borehole. It might seem light a small problem but when there is leaking from a gas tank, even 30 years ago, the leaking was continuous which means that there is probably more than only a bit. Because hydrocarbons were found in one borehole (which I assume are above the permissable limits) you have to drill more boreholes to find the limits of the contamination. You then have to remediate it to the satisfaction of the AB and potentially the Federal Environmental Departments. If any contamination stays within the property boundaries you might not need to remediate but you will have to monitor the contamination until the AB and posibly the Federal Environmental Departments are satisfied it won`t migrate. This also is expensive.

No deal is worth being responsible for environmental investigations. From my experience I suggest you run from this deal.

Stephen

 

[MarkTorgerson]

QUOTE (ssteckler @ Dec 1 2007, 11:15 AM) Mark,

Before I joined REIN I had a career over several years monitoring and remediating contaminated sites in BC. The previous replies were right. You don`t want this deal. Phase 2 investigations are expensive. It can, and probably will, bankrupt you.

There are hydrocarbons found in one borehole. It might seem light a small problem but when there is leaking from a gas tank, even 30 years ago, the leaking was continuous which means that there is probably more than only a bit. Because hydrocarbons were found in one borehole (which I assume are above the permissable limits) you have to drill more boreholes to find the limits of the contamination. You then have to remediate it to the satisfaction of the AB and potentially the Federal Environmental Departments. If any contamination stays within the property boundaries you might not need to remediate but you will have to monitor the contamination until the AB and posibly the Federal Environmental Departments are satisfied it won`t migrate. This also is expensive.

No deal is worth being responsible for environmental investigations. From my experience I suggest you run from this deal.

Stephen

I was away for a couple of days. Thanks for everyones response. I will take the advise to heart.
Just to answer a couple of the questions; The tanks were indeed removed 30 years ago when this building was constructed. The price reflects the environmental issue. It is currently significantly below market. The seller is also my long term tenant. It is an odd deal, but a bank is the part owner and also has a leased signed until 2032. The rest of the tenants are doctors, lawyers etc. I have also read that the government will pay uo to $160,000 for remediation of a commercial site. I`m not sure if anyone has any experience with this?? The deal as it stands is definitely concerning. The are a few things that still attract me to it. The price. The fact that it has been there for 30 years without issue. The goverment may pay for a good part of the cleanup. The part owner is also a bank and has a 25 year lease. The only reason they are selling is because the other partners are well into their 70`s and want out. Maybe I could offer them a higher selling price with a condition that they are fully responsible for any cleanup.

 

[mikecunning]

QUOTE (Torg @ Dec 2 2007, 08:51 AM) I was away for a couple of days. Thanks for everyones response. I will take the advise to heart.
Just to answer a couple of the questions; The tanks were indeed removed 30 years ago when this building was constructed. The price reflects the environmental issue. It is currently significantly below market. The seller is also my long term tenant. It is an odd deal, but a bank is the part owner and also has a leased signed until 2032. The rest of the tenants are doctors, lawyers etc. I have also read that the government will pay uo to $160,000 for remediation of a commercial site. I`m not sure if anyone has any experience with this?? The deal as it stands is definitely concerning. The are a few things that still attract me to it. The price. The fact that it has been there for 30 years without issue. The goverment may pay for a good part of the cleanup. The part owner is also a bank and has a 25 year lease. The only reason they are selling is because the other partners are well into their 70`s and want out. Maybe I could offer them a higher selling price with a condition that they are fully responsible for any cleanup.

Governments MAY do a lot of things...if the government will pay up to $160k, how come the current owner hasn`t used the program? $160k out of a minimum potential of $500k isn`t that inticing...Whichever way you slice this thing, it will ultimately become a huge bottomless pit for money and time...just think how long it will take to wind through the bureaucracy and then there`s a policy change...if you insist on pursuing this, insist on a clean bill of health for this property and all adjoining properties. I have seen recent case law where properties owners were held liable for contamination 50 years back...your forehand knowledge of such contaminiation will ultimately reduce your legal position should it ever go to court...sure the above insights on the tenant base and lease etc., are interesting but there are better, easier deals out there.

 

[navaz]

Hello Mark

Looks like you have generated a lot of answers, I would be inclined to walk -but if you really want to go ahead -try to get a maximum price quotation from an envimental engineer for the clean up and ask for a discount.

Also something to think about -the current owners want to sell -they know the enviromental issue -why are they not trying to clean up? Perhaps scared of what the may actually find?

This property may be a nice JV with someone who is competant and understands envirmental issues and clean up costs and is willing to put thier money where their mouth is

 

[MarkTorgerson]

QUOTE (navaz @ Dec 2 2007, 03:32 PM) Hello Mark

Looks like you have generated a lot of answers, I would be inclined to walk -but if you really want to go ahead -try to get a maximum price quotation from an envimental engineer for the clean up and ask for a discount.

Also something to think about -the current owners want to sell -they know the enviromental issue -why are they not trying to clean up? Perhaps scared of what the may actually find?

This property may be a nice JV with someone who is competant and understands envirmental issues and clean up costs and is willing to put thier money where their mouth is

Thanks Navaz. A JV partner that does environmental cleanup would also be an interesting and creative proposal. Even if this did cost $500,000 to cleanup, there is still a huge upside. There is a gigantic separation between list price and market price. I may also offer $100,000 more than list (maybe more) with the condition that the building comes with a clean bill of health and they are also liable for any surrounding buildings as well. I wont take this on the way the deal stands but I am not quite ready yet to walk either. I do agree that trying to cleanup this property myself is definitely not an option.

 

[mikecunning]

QUOTE (Torg @ Dec 2 2007, 03:16 PM) Thanks Navaz. A JV partner that does environmental cleanup would also be an interesting and creative proposal. Even if this did cost $500,000 to cleanup, there is still a huge upside. There is a gigantic separation between list price and market price. I may also offer $100,000 more than list (maybe more) with the condition that the building comes with a clean bill of health and they are also liable for any surrounding buildings as well. I wont take this on the way the deal stands but I am not quite ready yet to walk either. I do agree that trying to cleanup this property myself is definitely not an option.


Try another approach...take $500k , add it to the purchase price...what type of CAP do you end up with?

If it reduces the CAP to 7-8% you could buy a building today with a clean bill of health for what would amount to the same return once all the work is done...and the beauty of it is you don`t have to do any work!

 

[MarkTorgerson]

QUOTE (mikecunning @ Dec 2 2007, 05:59 PM) Try another approach...take $500k , add it to the purchase price...what type of CAP do you end up with?

If it reduces the CAP to 7-8% you could buy a building today with a clean bill of health for what would amount to the same return once all the work is done...and the beauty of it is you don`t have to do any work!


Thats great Mike. I think that is the type of approach I am going to take.
Thanks

 

[HeatherShadlock]

QUOTE (Torg @ Dec 2 2007, 09:51 AM) I was away for a couple of days. Thanks for everyones response. I will take the advise to heart.
Just to answer a couple of the questions; The tanks were indeed removed 30 years ago when this building was constructed. The price reflects the environmental issue. It is currently significantly below market. The seller is also my long term tenant. It is an odd deal, but a bank is the part owner and also has a leased signed until 2032. The rest of the tenants are doctors, lawyers etc. I have also read that the government will pay uo to $160,000 for remediation of a commercial site. I`m not sure if anyone has any experience with this?? The deal as it stands is definitely concerning. The are a few things that still attract me to it. The price. The fact that it has been there for 30 years without issue. The goverment may pay for a good part of the cleanup. The part owner is also a bank and has a 25 year lease. The only reason they are selling is because the other partners are well into their 70`s and want out. Maybe I could offer them a higher selling price with a condition that they are fully responsible for any cleanup.


Although, I agree with everyone that environmental issues are not something to be taken lightly (my husband is an environmentalist in the oilfield but does some reclamation), I do not see what the harm is in putting an offer forward that states that the current owner takes all the responsibility of the clean up and it is gives it a clean bill of health before the deal proceeds. One that meets all government and environmental agencies standards. Same as a building inspection. It can be a lengthly process but you are putting the responsibility on them. They will have to do this for the majority (99.999% of the buyers out there) I have known of 2 buildings and lots that were former gas stations that used the governement grant in order to have tanks removed and do the clean up process. One had several issues and it took well over a year to get a clean bill of health. The other had very few and it only took a matter of months. Both have since changed hands and have thriving businesses now. I believe that it is possible to change a bad situation around. It is a matter of what is your limit??? How much time and energy not to mention funds, do you want to put into this?? And be sure not to underestimate how much time and energy it will involve. If the vendors truly want to get rid of it, and if one of the part owners truly is a bank, then they will see the value in getting the environmental issue resolved. Ask that bank if they will finance you, and when they say "no", then that is your bargaining power. How do they expect to sell a property that they would not finance anyone on. They don`t have faith in their own investment.
So by writting it into a deal, they have the assurrance that they have a solid buyer once they are completed so that they are not having to wait even longer. And you are only going to pay the agreed upon price at the time the offer was made.

I think that if you believe it to be a good deal, then look into it a bit more, but definately don`t take on the property without a clean bill of health first!


HS

 

[MarkTorgerson]

QUOTE (HeatherShadlock @ Dec 3 2007, 02:05 PM) Although, I agree with everyone that environmental issues are not something to be taken lightly (my husband is an environmentalist in the oilfield but does some reclamation), I do not see what the harm is in putting an offer forward that states that the current owner takes all the responsibility of the clean up and it is gives it a clean bill of health before the deal proceeds. One that meets all government and environmental agencies standards. Same as a building inspection. It can be a lengthly process but you are putting the responsibility on them. They will have to do this for the majority (99.999% of the buyers out there) I have known of 2 buildings and lots that were former gas stations that used the governement grant in order to have tanks removed and do the clean up process. One had several issues and it took well over a year to get a clean bill of health. The other had very few and it only took a matter of months. Both have since changed hands and have thriving businesses now. I believe that it is possible to change a bad situation around. It is a matter of what is your limit??? How much time and energy not to mention funds, do you want to put into this?? And be sure not to underestimate how much time and energy it will involve. If the vendors truly want to get rid of it, and if one of the part owners truly is a bank, then they will see the value in getting the environmental issue resolved. Ask that bank if they will finance you, and when they say "no", then that is your bargaining power. How do they expect to sell a property that they would not finance anyone on. They don`t have faith in their own investment.
So by writting it into a deal, they have the assurrance that they have a solid buyer once they are completed so that they are not having to wait even longer. And you are only going to pay the agreed upon price at the time the offer was made.

I think that if you believe it to be a good deal, then look into it a bit more, but definately don`t take on the property without a clean bill of health first!


HS

That is the direction I am going. I had an accepted offer that I was completely covered with for conditions. That basically got my hands on the phase 2 environmental report. There is indeed some issues. How bad they are is the unknown. So what I have done is increase the agreed price by $175,000 with the condition the property has to come with a clean bill of health. Between the increase of $175,000 as well as whatever they can get for government grants, they will have some funds to begin whatever cleanup necessary. I would even entertain a counter offer where they increased the sell price by more than $175,000 as the numbers still work. What this will do is get the property cleaned up with them assuming the risk. I`m fine with that deal. If they don`t accept the methodology of my new offer, I will just walk.
Thanks

 

[RebeccaBryan]

Gotta love this site and the great advice you just received hey? If they won`t agree to that, then it would be obvious that it`s not a good idea.

 

[MarkTorgerson]

QUOTE (RebeccaBryan @ Dec 3 2007, 06:45 PM) Gotta love this site and the great advice you just received hey? If they won`t agree to that, then it would be obvious that it`s not a good idea.

Definitely. At very least, I know alot more about environmental issues than I did a week ago.
Thanks all.

 

[bmittlefehldt]

Getting the current owner to clean this up sounds good, but what happens if something comes up later? A guarantee from the current owner is probably next to useless. If you go this route, check out getting insurance for this risk.