Skip to Main Content

From the Trust Perspective: Look before you leap at low-cost real estate 

by Bob Haynes, NCLM Associate Director, Risk Management Services 

In the recent economy, municipalities have had more opportunities to acquire vacant buildings at little to no cost.  Several obtained old schools, vacant manufacturing plants, armory buildings or motels with the intention of restoring them to benefit citizens. However, remember the hidden costs and risks involved in acquisitions and maintenance before committing to the property.

Before our Property/Liability Insurance Trust can insure a building, we must conduct a risk management assessment to fulfill our fiduciary responsibility to all the members of the trust. The following are examples of property acquisitions that have had risk management issues:

  • Vacant manufacturing plants are subject to theft. At one plant, the building was stripped of copper wiring and at another plant, the HVAC units were pushed off the building and stripped of copper.
  • Larger vacant properties are expensive and harder to insure, despite a low tax value. In one instance, the town was able to purchase at a very low cost in hopes of converting the complex to a conference type facility, Very limited coverage could be provided due to the condition of the roof.   Security of the premises and environmental issues, like asbestos, lead or fuel tanks, also needed to be considered.
  • Unclear use plans. A municipality was able to purchase a hotel for a bargain basement price, but it was not clear if the building would be renovated and for what purpose. Risk management issues included a possible nuisance hazard and the need for a security fence around the property.
  • Failing infrastructure. A vacant building that built in 1917 became property of the municipality, but it was uninsurable because of fractures to the exterior wall and holes that were present in the roof. 

In the above examples, you may need to ask the following questions:

  • What is the intended purpose of the property?
  • Do you intend to demolish the building for the land?
  • Do you plan to renovate the building?
  • If so, what will be the cost of the renovation?
  • Have you conducted an environmental assessment to determine if asbestos, lead, underground storage tanks or other forms of pollution exist?
  • If lead, asbestos or other pollutants are present, what will it cost to remove the pollutant from the building or land?
  • Are there any conditions that conflict with the Americans with Disabilities Act (ADA) or building ordinances?
  • What length of time will the property be vacant?
  • What security measures will be in place to prevent minors or the homeless entering the property?
  • Are there any nuisance hazards that might be attractive to minors?
  • Are there any ponds  or water hazards on the premises?
  • Is the property in its current condition insurable?  (condition of roof, floor, walls)
  • At what value should I insure the property?
  • What will be the premium to insure the property?
  • Will theft and vandalism coverage be provided by the insurer?

Adopting a risk management approach before acquisitions of this type allow for:

  • Effective use of public funds as you identify the actual costs involved in a property acquisition before making the purchase thus helping to guard against wasteful expenditures
  • Maintain productivity since employees or resources are not diverted to remedy unforeseen problems
  • Identifies exposures, particularly those that are hidden or difficult to identify
  • Increase community attractiveness by avoiding a long-term eyesore
  • Reduce future uncertainties through application of a structured approach to consider these applications

Bottom line: a “really good deal” on the acquisition of property cannot be determined until a full risk assessment is made along with a clear plan on how the property will be utilized, how renovations will be financed and the timing that all of this can take place.