According to the US Environmental Protection Agency, there may be as many as 225,000 abandoned gas stations and lightly contaminated petroleum sites in the USA. These eyesores blight communities, but the good news is that these properties can be brought back, cleaned and returned to productive reuse.
In 2005, my wife, Judy, and I purchased a former Esso gas station property in our hometown of Montclair, New Jersey. For several years I ran a business from there called World Pottery, which was a garden pottery import warehouse with plants. It was always our plan to improve the original, run-down cinder block structure.
First we needed to deal with the contamination. When we occupied the property in 2000 it was filthy, with dozens of old tires, chopped up engine blocks and unidentifiable auto parts, oil spills on the pavement and soot so thick on the interior walls you could draw in it with your fingertip. We spruced it up enough to run a successful garden pottery business. Lurking underground, however were more problems caused by leaky tanks, spilled gasoline and oil. What you can’t see is scary. Was this a $10,000 problem. A $100,000 problem. $200,000? More? You just don’t know. Judy and I had great trepidation but no choice and we entered into an NJ state-run environmental remediation process that, though very slow, ended up not being as costly as our worst fears. At the same time we selected an architect and began thinking through our options.
Plans A, B & C(ollaboration)
Plan A was a 2 story mixed use building. There would be three modest apartments on the 2nd floor and two retail spaces at ground level. Then construction estimates came in high, especially for the rental apartments, and things went from bad to worse when in April 2006 the township approved an affordable housing program that would have added a $45,000 fee to our modest project.
Plan B coincided with a revised business plan for World Pottery and was a single story building with a useable roof for retail displays. It passed township review, garnering the required variances, but the “nut”, all falling on World Pottery, seemed too large, too risky.
Then we looked at the office building across the street — where Bob, Jack, Jason and David worked. Bob and David were Wall Street veterans turned developers. Jack is the best builder in town. Jason runs a medical business and has serious interests in jazz and environmentalism. They had a direct interest in the neighborhood and it took no time to determine that a partnership was the way forward. We’d use no banks, the project would be all equity. Together we joined in a new corporation, and simplified Plan B into Plan C – a single story green commercial building. We also decided to make this a spec building and to close the World Pottery retail business. Having a retail store had its rewards but the hours were long and being a small and independent retailer is a tough road in 2009 so we refocused World Pottery toward distribution only, eliminating our need for retail space.
The partnership was a true collaboration. One important key is that our partners were also professionally involved in the project. In addition to writing checks for 100% of the construction costs, this group met at least weekly to hammer out details and identify savings.
The resulting project came in without debt risks and has gotten rave reviews by town residents. It was the talk of Spring season soccer sidelines! Nearly finished, it features 14 foot ceilings, old-look brick, onsite parking, rooftop solar panels and low water native landscaping. We started in August 2008 and more or less had it completed by February 2009. We have two signed leases for 100% of the space and are now hammering out the interiors with scheduled occupancy set for September 1, 2009.
Judy and I could have chosen to take this on ourselves and kept 100% of the equity but to do this we would have had to put in way more cash than we did, we would be burdened with a small mountain of debt and made novice mistakes. What for? We are fortunate to have found tenants so quickly in this terrible market — thanks to our partners. As it stands we are the largest shareholders with the balance of the equity split among the partners. A bookkeeper distributes balance sheets and P&L’s each month — everything is transparent.
With the building now fully leased its value is at its maximum and we are about to begin shopping to put a mortgage on the property and take out some money.
Replicable Approach
I think this is a replicable approach. Following this model, property owners could transfer their properties into a new corporation where they would be joined by local partners and collectively write checks up to the total project cost, taking money out only after the building is fully leased. These local partners can be anyone, but the power of our partnership came from the composition of its members — all of whom added value during the development process. For property owners the message is to go all the way and develop their properties into their highest and best uses, then – after creating value – cash out. Too many commercial properties sit vacant and forlorn as their owners wait for huge paydays upon selling. They want the value of the eventual highest and best use without the work or investment involved in creating it. Our approach turns this on its head. Collaborate to make the value real, then share the rewards.
Going Green
In the first partner meetings during winter 2008, we decided to construct a green building. I had previously secured a hefty rebate on solar panels from the NJ Clean Energy Office and that, combined with the groups’ inclinations, caused us to explore obtaining LEED certification. LEED, which stands for the Leadership in Energy and Environmental Design, is a green building rating system that provides standards for environmentally sustainable construction.
With the building complete, in March, 2009 we pressed the “submit” button on the U.S. Green Building Council’s website, having completed an application for Gold Level, LEED status. We could have done less and just had a few green items but our group doesn’t tend to cut corners. LEED provides a framework and requires a discipline throughout the construction process that produces the most sustainable building. And the LEED process places great emphasis on energy and producing a high performance building. Thanks to treated glass, awnings, cellulose insulation and attention to detail, our tenants will enjoy a well lit, tight building with clean air and reduced utility bills.
The Curse of Small Projects
When you build a commercial building your money wants you to build as large as possible. Small projects, however, have constraints. This property is on a corner lot and we nearly complied to the letter with onsite parking requirements. So with setback requirements on two sides and with providing 15 of the 17 required spaces (we received a variance for two), the required sitework was more and the resultant building footprint was less, than our money would have liked. And LEED certification raised our building construction costs by roughly 7%. On larger buildings I can see how LEED certification would be at cost parity with conventional construction but the very small size of our project, with 3,500 square feet to spread costs over, led to an inevitable premium. I think we could do it again for a 5% premium, maybe less, knowing what we now know having gone through the process once.
On the other hand speed has positive effects on ROI and we did lease the space quickly – in part because it is green. Still it is clear that small properties are difficult-to-develop and offer lower ROI than somewhat larger projects. Given that many of the 225,000 contaminated properties nationwide are like our property, former gas stations likely to have similar physical characteristics, it is no wonder their positive reuse is taking time.
The lesson from this project is that small or large, green or not, collaboration was the mechanism that moved things forward. I’d encourage all property owners to explore whether this approach makes sense for them.