Ask the tough questions

[Will Kenner]

There's nothing like the feeling of getting that "slam-dunk" deal under contract. The perfect property at the right price, that checks all the boxes. This past week I felt I had such a scenario. After competing with 2 other offers, I finally got under contract a commercial property in a prime out of state location that was fully leased with a diverse tenant mix, and was offered at a reasonable cap rate. All seemed to be lining up beautifully so I decided to hop on a plane, then rent a car for a 2 hour drive, and finally spend some time at the property in person. 

When I first arrived, I was pleasantly surprised that the building was more or less as advertised, and the location was even better than I thought. As the meeting with the brokers and property manager continued, I made sure to not let the excitement and emotion get the better of me. Thinking back to what I've read in various books on due diligence and experiences running my current commercial property, I made sure to ask the tough questions, and persist on getting clear answers to statements. This paid off in a big way. There was a discrepancy in the age of the building as stated in the OM vs. what the property manager had mentioned during the meeting. I ask him to clarify and at first he dismissed the question, saying everything is up to code. I then asked why wouldn't everything be up to code? Is there something that would be in question? He then proceeded to give a chronological account of the structures on the property and said that there was a building built in 1962 that was formerly on the property before the current structure. At first, I assumed asbestos and maybe a small heating oil tank but since that structure had been torn down, it'd be a non-issue. But I kept pressing, and asked what kind of building was built in 1962. Come to find out, it was a gas station. 

I didn't have any experience with gas stations before but I know the clean up can be messy and expensive. And since this property was across the street from a very prominent destination lake, governmental action would be swift and strong should any environmental contamination issues come up in the future to protect the lake. So I dug deeper into the city, county, and state records. It was confirmed that indeed a gas station was on the property, and two of the three tanks had been removed. During their removal soil samples were taken and dirt was removed until the readings were within permissible levels. The third tank (a 10,000 gal tank) was left behind, and there was no documentation stating that it was officially "decommissioned". Furthermore, despite the soil sample reports being within permissible levels, there was no "NFA" documentation. 

Of course rules and regulations may change, but if a property that was once "contaminated" was cleaned up and receives an NFA designation, then the risk of expensive remediation in the future is greatly reduced. Now some BP members may have experience with environmental cleanups of former gas stations and would consider this a non-issue. Given the property was a prime location, it may be worth the investment and risk. For me however, it was not. If ever I was required to remove that remaining tank and/or contaminated dirt, my pockets aren't deep enough to absorb those costs.  

The take home lesson for me with this experience was to always press for clear and concise answers, assume nothing, and don't let excitement cloud your judgement. As a bonus, this was my first out of state property that I've had under contract so if anything, it was a great experience beginning to build a team in a city far from home. At least on the next deal I'll feel a lot more confident with the idea of long distance investing and the logistics involved!