15% cap commercial property BUT open enviromental....now what

8 Replies

I knew this property and the environmental would be a tricky deal and I have limited experience.  There has been site work on this property but solvents run into neighboring properties.   Here is where we are today -

- working with an environmental attorney (he said to escrow multiple of 3x of quotes on environmental

- looking for quotes for environmental insurance

- traditional lending commercial broker say they can't do the deal with Open DNR case

- what hard money / alternative financing options exist??  My thought is to spend 1-2 years getting a closure letter and then refinancing.   Any thoughts / idea's / strategies??  Thanks!!

@Andy Grebe

Can you give some more background to the property to help the members give better advice? Is it a multi family, commercial, what size and price point?

I assume the Phase 1 has been done and that lead to a Phase II. What are the results of the Phase II regarding damage and remediation options?

@Bill F. - thanks for reply (first time poster) it's a commercial building with 30,000 square feet.  $1,900,000 purchase price.  According to the sellers (the receiver) there has been no phase 1 nor phase 2.  Goal is to avoid being the responsible party.

The open environmental dates back to the 1980's with a manufacturing company

@Andy Grebe No Problem. 

Is $1.9M around market? 

The attorney will be your best source of info, but you'll never get any bank loan without a clean Phase I, so that will have to happen if you want to get this thing for cash and refi out your capital.

I personally would never buy an asset like this without a Phase I even if it was all cash. The risks are simply to high.

To answer your original question I'd try and find a speculative PE fund that is willing to take a risk like this; maybe someone who has a deep deep understanding of remediation like this and take them on as a money partner. The risk that comes from not knowing what you are doing in a deal like this is astronomical. It is not outside the realm of possibility for the asset to become worthless.

I represent a number of lenders on environmental issues. if you have solvents migrating off-site, you may not only possibly become a responsible party but also could become subject to toxic tort suit for property damage. your lawyer should advise you on the wisdom of enrolling in the state brownfield or voluntary cleanup program. to maintain liability protection, you need to exercise "appropriate care". doing work pursuant to a state agreement will generally provide you with such protection. you probably wont be able to get insurance coverage for on-site cleanup but might be able to get coverage for off-site claims. I cannot emphasize enough the importance of enrolling in a state program ASAP. 

Until you have an approved cleanup plan, lenders are going to use a worst case scenario for estimate. You really cannot develop a good estimate until the scope of the contamination is fully understood. solvents are very tricky. i have never seen a solvent cleanup that came close to pre-cleanup plan estimates.  

@Bill F. thanks for the note - I have been quoted a refinance with a closure letter between 3.3-3.8 million, that's why I'm interested in figuring it out.

@lawrence - the quote i received from the environmental consultant was for $55-80k for analysis and closure.  My proposal to the Receiver will be for an additional credit of $250k plus.

In regards to an indemnification letter, how much protection will that provide??

What if it takes 10 years to get closure? You don't know how long this will take. Here is a tip: If your local banks will not finance the deal, then you should walk away. If it is too risky for a lender, who makes their living lending money, it would be too risky for me. There are easier and more certain ways to make money than this deal.

The cleanup estimate is only as good as the data collected. Is ur consultant confident that they know the horizontal and vertical extent of the contamination? If u plan to take the building down as opposed to repurposing it, you may encounter contaminated soil that was previously capped by the slab.the estimate sound low on the low end to me.