Top Ten Questions I Got At CRE CONVENTION -- #2 - Posted by David Finkel

Real Estate Investing Retail
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Posted by JohnBoy on April 06, 2002 at 24:18:38:

Nope! Every lender doesn’t require this. I know a guy who buys lots of commercial property and he only had to get a phase 1 report done. That doesn’t test the soil for contamination.

I have borrowed hundreds of thousands myself through banks and leasing companies for buying existing dry cleaners and equipment. Not a single lender has ever asked for anything regarding contamination. I even had one loan guaranteed through SBA and even they didn’t require anything and that was on a loan buying a cleaners that had a plant on the property for over 20 years! So I guess it just depends on the lender.

Also, if it was a property where a cleaners didn’t exist at that the time when the financing was taken out then there wouldn’t be anything on that. If a loan was taken out on a new plant where one had never previously existed on the property then there would be no reason for any of this since the site would obviously be clean. So later someone else comes along and by that time the ground could be contaminated from the owner and without getting the soil tested there would be no way of knowing if it was contaminated or not.

Any prior endorsements that may exist would be of no benefit from any time lapse beyond that point since any contamination could have occurred after that point. Doing a lease option or a lease or buying on contract or any type of seller financing would not require any testing to be done. And unless a lender you were using was to require any testing you wouldn’t know about it and if they only require a phase I test then that isn’t going to help. The only way to know for sure is to have someone come in and drill wells through the floor and take soil samples around the cleaning machine area and have it tested for contamination. As already stated some lenders won’t require anything at all!

Btw, it would be up to the seller to have any testing done and provide you with a certificate documenting the soil is free of any contamination. Otherwise they can expect to get a LOT less for the property and/or business.

Now another guy I know that was leasing space where he owned a dry cleaners had to go through testing because his landlord was refinancing the shopping center. The landlord’s lender required soil testing on the dry cleaner’s site before they would fund the loan. It cost the dry cleaner $80k to go through this and that didn’t even cover any clean up costs! That was just to cover his legal expense and cover the cost of having a bunch of wells drilled throughout his plant, through the concrete of his floor. So again, if there is going to be any financing involved then it will depend on the lender as to whether they will require anything or not and if they do, then the type of testing they require. And a phase I isn’t going to cut it!

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Top Ten Questions I Got At CRE CONVENTION – #2 - Posted by David Finkel

Posted by David Finkel on April 04, 2002 at 12:43:58:

QUestion #2:

What is better, to buy on a lease option or to buy subject to the existing financing?

Answer:

I ALWAYS prefer to get title to a property versus just an option PROVIDING I can make sure that I have NO personal liability on the financing. (THe only exception is if I am concerned about environmental hazards like buying a drycleaners and fear of EPA hassles.)

The reality is that you will find MORE (about 3 times more) deals as lease options as you will subject to. It takes an EXTREMELY motivated seller to sell you a house subj. to.

One thing to consider though, we convert 1 out of 3 lease option deals INTO subject to deals within 36 months of signing up the deal.

In conclusion, where possible get title to the property. If you can’t get title initially, buy on a lease option and see if you can convert the deal into a subj. to down the road.

I am heading camping for the next 5 days so I will answer questions when I get back and I will post question #3 next week. Take care!
David Finkel

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Top Ten Questions I Got At CRE CONVENTION – #2 - Posted by JohnBoy

Posted by JohnBoy on April 05, 2002 at 11:03:57:

I’m not sure when you stated, the only exception is if I’m concerned about environmental hazards like buying a drycleaners and fear of EPA hassles…if you were referring to just getting title or if you meant doing any type of deal at all with a property of this type?

To be clear on this for anyone reading this, it would not matter whether you were taking title to the property, or leasing the property, or leasing with an option, or owning the business, or even working for the owner of the business as a supervisor or manager, or possibly even a lender that makes a loan on the real estate or business. In any of these circumstances YOU can be held personally liable for any ground contamination found on the property, whether it be from 50 years ago or 50 years into the future. Meaning if they found contamination 50 years after you were dead, they can dig you up by going after your estate to pay any costs for clean up! The only exception being if you had a soil test getting a clean bill of health before you buy and when you sell. Otherwise if you are in the chain of title they can come after you! You can’t even hide behind using any entity such as a corporation to avoid personal liability.

So if you were to ever get involved with properties of this type, BEFORE you get involved, ALWAYS, ALWAYS, ALWAYS have the soil tested before hand to insure there is no existing contamination.

If you got involved and later were to sell, then get the ground tested so you have proof the soil was clean at the time you sold the property.

Here’s the problem. If they ever discovered the soil was contaminated there is no way to prove WHEN the contamination had taken place. It could have been from 25 years ago or just recently happened. But since there is no way of knowing when it actually took place, they can go after every person in the chain of title that ever had anything to do with owning the property, leasing the property, owning the business, managing the business, lending money on the business or property, etc. The only way to protect yourself is if you get a soil test before getting involved and again when you go to sell and be able to establish that while you were involved in any way that the soil was not contaminated during that time, or if it was you had the contamination cleaned up and delivered the property with a clean bill of health. Then if there was ever any future contamination discovered it would fall on everyone that was involved after you.

I think in the future any costs of clean up for contaminated property of this type will be minimal and very affordable. They already have developed chemicals that they can just pour into the soil where it absorbs itself into the soil and attacks the solvent contaminating the ground avoiding the high cost of having to remove the soil and/or digging a bunch of wells all over the property. The average of cost of clean up for a dry cleaners is about $80k and can go as high as $300k depending on the property and amount of contamination.

Although everyone in the chain of title can be held liable, it doesn’t mean they will come after you specifically, depending on your net worth at the time. They typically go after those that have the money first, which could be the current owner of the business and/or the property owner. BTW, you can’t get out of it by filing a BK either because that liability is not dischargeable in a BK. So ALWAYS have the soil tested before getting involved unless you are prepared to incur the expense of clean up.

On the other side, this could be a great opportunity to buy property at great bargain prices because this issue scares off a lot of potential buyers where you could snap the property up cheap and pay the clean up costs by still coming out with a fantastic deal! Just be sure to do your homework on this before just jumping in!

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Happy fishing, David! (nt) - Posted by ScottE

Posted by ScottE on April 04, 2002 at 16:06:41:

nt

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Re: Top Ten - Posted by David Finkel

Posted by David Finkel on April 10, 2002 at 11:27:11:

Dear JohnBoy,
I appreciated your clarification and agree with the details you give. My philosophy is to get title from a seller RIGHT AWAY and then do all my final due diligence (making sure the seller understands orally and in writing that I might find things I don’t like and give them back the propt.) I do this because if I go to the effort of doing all my due diligence I want to make sure the seller won’t back out. That said, I just wanted to make sure people didn’t follow that advice on a comercial property where there were potential EPA risks. My best to you, David Finkel

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Re: Not to worry… - Posted by Anthony-OH

Posted by Anthony-OH on April 05, 2002 at 22:42:15:

Ok if your taking a property Subject-To the existing mortgage then the lender required the original borrower to pay for an EPA endorsement which would cover any liability from the “scary” things mentioned.

Every Lender on the planet requires this endorsement because of the risks involved if any contamination occurs.

So I personally wouldn’t worry about environmental issues unless you are getting the deed without this endorsement having been acquired for the financing on the property.