A real life story. In 1997 I considered the purchase of a commercial building to house my businesses. To make it doable, I was looking at a large building in partnership with another business owner who had a towing and RV business. It was a perfect match. We located a great building in a great location with what we thought was a lot of upside potential. We made an offer, and after some negotiation, came to an agreed-upon price and terms.

Off to the bank we went. They liked everything about the deal. Their only request was a Phase I environmental check given prior usage of the property as a shop. We hired a great firm who quickly undertook the investigation. After completing the survey we received a call from the company. Seems there was a building behind ours that was operating a mini sand casting foundry. Our side lot was gravel, as was theirs. We learned that they would break down the molds and throw the sand out in the parking lots without realizing what was in the sand. Our lot had strong traces of a number of toxins and heavy metals. Any cleanup was not going to be cheap and no one knew how deep the chemicals had gone into the soil. The bank, understandably, ran away very quickly.

I bowed out. In the end my partner could not finance the property with a bank. He did buy the building but only through a land purchase contract with the seller. He still has the property. Who knows what happens when it comes time he wants to sell out. He’s a great guy and I wish him all the luck in the world in selling it.

You may be wondering now why all this bad news about buying my own place? The fact is it’s one deal I cite as an example of how these things can go. In the end, done right, there are a lot of reasons to buy your own property, or expand to additional owned locations. It is also a warning to be absolutely sure you involve a good commercial property broker with experience in our industry, your attorney, your accountant and a good business banker. It may be especially helpful if the banker is familiar with one who underwrites Small Business Administration loans. But, that’s a subject for another time.

Landlords grow rich in their sleep. – John Stuart Mill

According to the Bank of America, “Purchasing property for your business is a good idea. When it comes to commercial real estate, the word “commercial” applies to any property that you use to grow, expand or support your growing business. This can be anything from warehouses, shopping centers or hotels to office buildings, apartment complexes and more. With this in mind, there are many reasons to consider making such an investment. It’s a chance to build equity, make your expenses more predictable and possibly gain tax advantages.” They cite some additional advantages as well:

• Fixed rates. Enjoy the peace of mind of knowing what your costs will be month to month with a fixed-rate loan; there is no exposure to fluctuations like market rent increases.

• Tax breaks: The costs involved in owning and running your business space can result in favorable capital gains treatment and expense deductions like mortgage interest, property taxes and more. Consult with your accountant before making a decision to buy.

• Total control: When you own, you call the shots. You have direct control of your investment, as well as any tenants or uses of the building. Want your favorite color? Done. Think it’s time to renovate? Go ahead.

• You have the freedom to customize and tailor your business as needed. This can really be a plus as your business evolves.

• Public exposure: Show off your brand and establish the personality and culture of your business for all to see. Maintaining, customizing and improving the quality of the property help represent your business and promotes strength and stability.

So, what happened to my deal? Thank the good Lord we had a banker on top of things who required a Phase I, or we may never have known what was in store for us. In my humble opinion, given the types of properties we’re likely after, and given experience with my case and others, the environmental should be right at the top of the list. Oh, and in case you are not convinced, think underground tanks!

Earlier the Phase I was mentioned. RMA, a respected East Coast environmental firm has provided a great overview of a Phase I review:
Some of the areas of investigation include:

• A thorough review of historical records of the property, including historical aerial photographs, fire insurance mapping (maps, usually older, of most of the U.S. showing what properties contained in the past, such as buildings, fuel tanks, etc.), and historical topographic mapping.

• A thorough review of readily available government environmental records of the property, such as for spills, releases to the environment, fuel tank registrations, hazardous material manifests, environmental records, etc.

• Interviews with current and past property occupants as might be obtainable, as well as others who might be able to shed light onto past or present uses of the property.

• A thorough site inspection, including all building interiors as well as all exterior property and grounds. This site inspection would include a visual inspection of the presence of features such as fuel or chemical storage tanks, the presence of stained soils, site activities, etc.

Source: Resource Management Associates

Simply put, the average cost of Phase I Environmental Site Assessments are going to be anywhere between $1,500 on the low side and $6,000 or more on the high side. It depends on the size and type of property involved. Any cheaper and you may well start to sacrifice quality. More expensive and you're likely looking at a Phase I at a pretty large, complex facility. Expect that a Phase I ESA will cost $2,000 to $4,000 on average for smaller commercial facilities such as ours.

There is normally no sampling or testing during a Phase I. Should issues arise, you’d most likely need to get a Phase II done.

A Phase II examination typically takes the information from the Phase I and goes further with soil and surface borings and more. Then, the material retrieved is analyzed in a lab for the presence of things you don’t want in your new soil. The fee for this work is generally in the $6,000 to $20,000 range. Not inexpensive, but compared to buying worthless property that has a big price tag for cleanup and is virtually unsaleable, it’s really a bargain! And since you are only doing this if Phase I shows something bad, it’s not always needed.

Again, you skip this part of the transaction at your own risk. And chances are, you won’t get a bank to bite unless it’s done. Might as well plan at least Phase I in your budget up front. Whether you do a Phase II will be based on what is found, how serious it is deemed to be and how badly you want the property.

There are a number of states who offer everything from advice up to and including subsidized loans for clean ups. I would talk with your attorney to see if they felt a discussion with the natural resource agency in your state is warranted. The EPA will step in with dollars almost exclusively for larger, abandoned sites. So, likely little assistance there. States are likely the best bet.

He is not a full man who does not own a piece of land. – Hebrew Proverb

Now we’ll move on to those factors that need to be considered in your property purchase beyond the environmental. These will include, but are not limited to:

• Proper zoning and issues with the municipal development regulations. I am aware of more than one business that has purchased property only to find their use does not conform. And be especially careful with Temporary Use permits. You may find it expires at the time of purchase. Finally, check to find out whether you are right in the middle of a Business Development District. These areas have attractive loans for you, but the city may, and likely does, take on a very active area-planning role.

• As they say in any real estate, location, location, location. All of us want to be on the corner of “Main & Elm,” but it isn’t always possible. If your shop is primarily repair, your crowd will come from about 5 to 10 miles around your place. So, you have some latitude, assuming you are aware of any competitors that already have the area locked up tight. On the other hand, if you’re selling fuel and/or have a convenience store operation, you best look right in the middle of all the action on busy streets.

• The condition and soundness of any buildings or other structures on the site: Seems obvious, but many have become infatuated with a new place and manage to look past a million flaws. This both takes away a bargaining chip and will cost you money to repair or upgrade later. This is the time I like to call in a competent building inspector and/or structural engineer. Oh, and don’t forget to have the roof structure checked out especially if you plan to use beams, etc. to support lifts and other equipment.

• If remediation was required in the past, was it done and is there a governmental release on the property. Be sure the remediation clearance is attached to the deed to make sure you’re able to address any issues later.

• The ability to expand by buying more surrounding property or enlarging the building on the current site. If you plan to expand or feel you’ll need more space for building, parking, etc., find out if you have access to purchase, lease or rent surrounding lots.

• Adequate parking: It goes without speaking. But a warning in advance, cities have specific parking spot counts depending on building use and size. And, if you are doing major work or need a place to safely store high-performance or other vehicles, be sure that works in the space.

• Vehicle storage possibilities and municipal requirements: If you will store or keep vehicles for longer than a day or two, the municipality may well have rules. In our city, for example, one cannot keep an unlicensed or unregistered vehicle.

• Expected equity value upside. Work with the broker to get some idea of how properties have historically performed as to value and what’s expected for the future. It’s all a guess, but a frank discussion about plans for other properties around you would be helpful.

• Your own business and future plans, especially years to retirement, bringing in family: For current shop owners this may likely be a second or new main location. One issue I see every once in a while is that a shop owner with children “assigns” the different shops to those staying in the business. If one shop is significantly larger or newer than the other, hit this issue up front. And, don’t assume you won’t relocate to the new property. No one regrets buying up!

• Access to adequate internet connections: Seems impossible but there are still areas that have issues with broadband, cable and other technologies. Moving, and then finding out you are either on a slow dial up or expensive satellite system is a shock you don’t need. Don’t assume, try!

• Adequate power and related utilities: Ditto internet. Make sure the building is serviced by adequate power and other utilities. And, this is a great time to be thinking about possible new equipment or other needs.

Again, a lot of these issues can be handled very professionally by your advisory team. Doing it yourself is dangerous. You tell your customers not to DIY their repair, this is a great time to take your own advice.