How to assess building for sale which includes drycleaners

Question

I am looking at mixed use building for sale that has a drycleaners which is included with the acquisition of the building. What sort of analysis and due diligence is required here? How do you assess the business. I would say this applies to any commercial property where a buyer is also acquiring an existing business.

Neil Schoepp · Answer

@Peter Fokas I second Joel's book recommendation. Brain talks form the trenches. It's a very good book.

I'm not sure how to handle the business but I will say, just In case your unfamiliar, to make sure a phase one envirormental study is performed. Dry cleaners use some nasty chemicals and if any of that contaminated the ground you will be on the hook for it.

Hopefully someone else will chime in on the business end of it.

Peter Fokas · Answer

Follow up: Reply from seller's agent:

Seller has no environmental reports and makes no representations, buyer may do this due diligence after the contract is final. Also they have no rental rate for the dry cleaners. I guess they do not charge themselves rent for that business. How do you go about determining what is a fair rental rate to use in doing all the analysis.

Peter Fokas · Answer

Thanks for input. And to be clear - buying the building includes buying the dry cleaning business too.

Kathy Henley · Answer

@Peter Fokas Dry cleaners are not awful. Check the last 2 years of the accounts and see if they paid on time.  Wait! Do you mean that you will own a dry cleaner company? I know nothing about that.

Acquiring a property with an existing commercial tenant is similar to residential:  read the lease.  One needs to know who pays for the repairs and the upkeep of the common areas, as this affects the cash flow; you must cash flow from day one.  If you need to change up the terms of the lease to improve the cash flow, when can you put it in play?

Due diligence is looking at the acutuals - expenses and income from the last one or two years.  Look for signs of deferred maintenance, troublesome water bills or high residential turn-over.  You are looking for an opportunity to improve things.

To value a mixed use building, separate residential units from the commercial and analyze them separately, then add the two together to  come up with your bid.

Joel Owens · Answer

You need a recent clean phase one ( at least under 6 months ago and preferably 3 months or less ). Make the seller pay for it if they do not have a recent phase one especially if you think there is environmental issues.

If you pay for it with a lender make sure you are added to the report for protections down the line. It usually costs about 300 to 500 to do so.

The report alone will be over 1,000. You don't want to waste money like that if what is found makes you not want to buy the property.

If there looks to be no environmental issues and a lender just wants an updated report to do a loan then that is a different situation.

The new dry cleaners or the conversions use green practices that are not supposed to contaminate the soil or area.

Even if a dry cleaners as a tenant is not there it might have been at some point of the centers history. If something was found you need a NFA ( no further action letter ) that it has been resolved.

I looked at an  8 million grocery anchored center for a client the other day. Was in a great area but was part of a brownfield redevelopment site. As part of the new development testing was done over and over and the EPA gave an NFA letter. The downside is the owner has to do multiple testings a year and provide to the EPA on  continual basis. Any future findings could lead to issues for the owner of the property down the line with the site so we passed on the property.

Joel Fischer · Answer

Just finished reading: The Due Diligence Handbook For Commercial Real Estate A Proven System by Brian Hennessey. Available on Amazon. Short and to the point.  Would definitely check it out if you haven't seen it.

How to assess building for sale which includes drycleaners

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