Imagine buying a property only to discover that
hidden underground tanks are leaking fuel into the soil, or that decades ago a
dry cleaner left behind chemicals that still linger beneath the surface.
Suddenly, your new investment comes with a multi-million-dollar cleanup bill.
That’s the risk posed by a little-known acronym:
REC, short for Recognized Environmental Condition. And if you’re buying,
selling, financing or potentially leasing commercial real estate, it’s
something you need to understand.
What is a REC?
In the commercial real estate world, a REC means
there is the presence or likely presence of hazardous substances or petroleum products on a property.
These conditions may come from:
• A past or current release of contaminants into the soil, water, or
air.
• Evidence suggesting a release might have happened, like stained soil
or corroded barrels.
• Circumstances that pose a material threat of a future release.
Think of a REC as a red flag during due diligence.
Just like a cracked foundation might derail a home purchase, a REC can bring a
commercial deal to a grinding halt.
Why Lenders and Buyers Care
A REC isn’t just an environmental issue, it’s a
financial one.
• Financing: Banks typically require a clean environmental report before
approving a loan. If a REC is flagged, the deal may be delayed, restructured,
or even killed.
• Liability: Under federal and state laws, the new property owner could
be held responsible for cleanup, even if they didn’t cause the problem.
• Value: Properties with RECs often appraise lower and can sit on the
market longer.
How the Process Works
When an industrial or commercial property changes
hands, buyers usually commission a Phase I Environmental Site Assessment (ESA).
This involves reviewing past records, inspecting the property, and interviewing
current or former operators.
If the Phase I flags a REC, the next step is a Phase
II ESA, which involves testing soil, groundwater, or air to confirm whether
contamination exists.
Depending on results, options include:
• Remediation (removing or treating the contamination).
• Seeking regulatory closure if issues have already been addressed.
• Purchasing environmental insurance to cover potential risks.
• Negotiating price adjustments to reflect the added risk.
Historical and Controlled RECs
Not all RECs are created equal.
• HREC (Historical REC): A past issue that’s been resolved to
regulators’ satisfaction and no longer poses a risk.
• CREC (Controlled REC): A contamination issue that remains, but with
restrictions in place (for example, limiting property use to industrial
operations only).
While these don’t always kill deals, they do shape
how a property can be used and what obligations an owner inherits.
How Buyers and Sellers React
For buyers, a REC means choices: walk away,
renegotiate price, or push the seller to pay for further testing or cleanup.
For sellers, a REC can mean offering concessions, securing insurance, or even
cleaning up the property in advance to avoid surprises in escrow.
The Bottom Line
A REC doesn’t always spell disaster for a
transaction. But it always changes the dynamics. Buyers, sellers, and brokers
who understand how RECs work can work through the challenges, avoid liability
and keep deals alive.
In commercial real estate, knowledge isn’t just
power. It’s protection.
Allen C. Buchanan,
SIOR, is a principal with Lee
& Associates Commercial Real Estate Services in Orange. He can be reached
at abuchanan@lee-associates.com or 714.564.7104. His website
is allencbuchanan.blogspot.com.
I recently guested on a podcast called The Industrial Real Estate Podcast. You see, its
host, Chad Griffiths, is a fellow industrial real estate broker and Society of
Industrial and Office Realtor. We share a passion for industrial real estate
and authoring books about our craft - his, Industrialize, and mine The SEQUENCE.
Our sixty minutes together was not quite Mike Wallace worthy, but for two
professionals geeking over truck doors it was close.
As I reflected on our conversation, a thought
occurred. In the time Chad and I have brokered - Chad over twenty years and I
over forty - how many classes of industrial real estate have become obsolete?
As the mind dump morphed into a review, I believed
it to be column-worthy. So here goes.
Concrete Block Structures
In the 1960s and 70s, the standard for small to
mid-sized warehouses in Southern California was concrete block. At the time, it
was inexpensive, durable, and easy to build. Fast forward a few decades and
block buildings fell out of favor. Why? They were prone to cracking, offered
limited design flexibility, and were far less energy-efficient than tilt-up
concrete panels. Today, investors look at a block structure and immediately
calculate how much it will cost to either retrofit it for earthquake safety or scrape
it altogether.
Warehouses with Ceiling Heights Shorter than 24 Feet
What was once considered “plenty of clearance” is
now laughably short. In the 1980s, 16–20 feet clear worked just fine when
distribution was more about floor stacking and hand-moving pallets. Then came
the rise of racking systems, e-commerce fulfillment, and the drive for cubic
efficiency. A 20-foot clear building today is relegated to mom-and-pop
distributors or creative reuses like breweries and gyms. Institutional tenants
won’t touch them. Twenty-four feet is the minimum bar now, with 32–36 feet quickly
becoming the new normal.
Buildings with Insufficient Loading for Large Trucks
Dock-high loading once meant a few truck wells
tucked into a building’s backside. That was fine when trucks were smaller and
supply chains less demanding. Now, tenants expect wide truck courts, multiple
dock positions, and a minimum of 130-foot depth for maneuvering 53-footers. A
shallow court or limited dock access instantly disqualifies a building from
consideration. In fact, I’ve had clients walk away from otherwise functional
properties simply because the loading couldn’t accommodate modern logistics.
Warehouses Converted to Telecom Hubs in the Late
1990s
During the telecom boom, a frenzy of
industrial-to-telecom conversions swept across the market. Warehouses were
gutted, generators added, and raised floors installed to handle racks of
equipment. When the bubble burst, many of these facilities sat dark, expensive,
and ill-suited for their original purpose. Few could be economically converted
back to warehousing. They became the white elephants of the industrial world,
proving how risky it can be to over-specialize a building.
Pre-Dot Com Data Centers
Much like the telecom conversions, the first wave of
data centers built before the dot-com collapse were designed for a world that
never fully arrived. Oversized chillers, underutilized floor space, and
outdated cabling left them obsolete within a decade. While the need for data
centers eventually exploded, it was the next generation - purpose-built,
hyper-efficient facilities - that captured the market. The early ones often
limped along, trading hands at discounts before being demolished or radically reconfigured.
Research and Development (Flex) Buildings
Once the darling of the 1980s and 90s, flex R&D
buildings were designed with equal parts office, light manufacturing, and lab
space. They attracted tech startups, defense contractors, and medical firms.
But as industries changed, those needs shrunk or migrated into either pure
office towers or specialized industrial campuses. Flex buildings with 50%
office and 50% warehouse became hard to lease. The market wanted either full
warehouse/distribution or Class A creative office - not the in-between. Today,
many flex projects have been scraped, converted to logistics buildings, or
repositioned for other uses.
Final Thought
Obsolescence in industrial real estate is both
predictable and instructive. What was “state of the art” in 1985 may be
functionally useless today. Brokers, investors, and occupants alike should
remember: buildings have life cycles just like everything else. The trick is
recognizing when a feature is no longer an asset but a liability - and acting
before the market forces your hand.
Allen C. Buchanan,
SIOR, is a principal with Lee
& Associates Commercial Real Estate Services in Orange. He can be reached
at abuchanan@lee-associates.com or 714.564.7104. His website
is allencbuchanan.blogspot.com.
As I write this, I’m
looking out over the vast blue Pacific Ocean. My wife, Carla, and I decided to
splurge for our 46th wedding anniversary. The horizon stretches endlessly, a
full moon reflects on the ocean, waves roll in with steady crashing, and I can’t
help but reflect on our life together.
You may wonder - what does
being married since the Carter administration have to do with commercial real
estate?
Bear with me. I believe
who you love and with whom you choose to spend your life matters foundationally
to building a successful career. In my case, Carla’s patience, wisdom, and
encouragement have been the bedrock under everything I’ve accomplished in brokerage.
And along the way, I’ve learned a few lessons that apply equally well to
marriage and to commercial real estate.
Commitment Outlasts Market
Cycles
Marriage requires
commitment - not just when things are easy, but through the tough times too.
Real estate is no different. Since I began in the early 1980s, I’ve watched
interest rates soar, the savings and loan crisis unfold, bubbles inflate, and
recessions squeeze the market. Through it all, commitment - whether to a
client, a property, or the process - proved more valuable than chasing
short-term gains. Just as in marriage, staying the course yields long-term
rewards.
Communication is
Everything
After 46 years, Carla and
I still occasionally misunderstand each other. But we’ve learned to keep
talking, keep listening, and keep clarifying. The same principle applies in
commercial real estate. Deals collapse when communication falters. Clients don’t
expect perfection; they expect honesty. A simple phone call explaining a
setback can preserve trust better than any contract clause.
Patience Produces Fruit
No one celebrates 46 years
without patience. There were times when raising kids, building careers, and
paying bills felt overwhelming. But patience - trusting that small investments
of time and effort compound - got us through. Commercial real estate rewards
patience as well. Transactions can drag on, negotiations can stall, and
entitlement processes can feel endless. Yet patience, paired with persistence,
is often the difference between a failed deal and a successful close.
Shared Values Create
Alignment
Carla and I built our life
on shared values: faith, family, and integrity. Those values guided decisions
on where to live, how to raise children, and even how to face hardship. In
brokerage, I’ve found that values alignment with clients is equally important.
Not every prospect is a fit. When you align with those who share your values -
fairness, transparency, long-term thinking - the relationship flows, and the
work is more rewarding.
Adaptability is Survival
Marriage is a constant
process of adaptation. People grow, circumstances shift, and unexpected
challenges arise. Carla and I had to adapt when careers changed, when children
left home, and when new seasons of life arrived. In real estate, adaptability
is equally critical. A strategy that worked in one market cycle may not work in
another. Brokers who survive are those who adjust without abandoning their
foundation.
Closing Reflection
Looking out at the
Pacific, I’m struck by how steady and timeless it feels. Yet even the ocean is
always in motion, waves constantly breaking and reforming. That’s marriage.
That’s commercial real estate. Both require a balance of commitment and
flexibility, patience and action, values and adaptability.
As I celebrate 46 years
with Carla, I’m reminded that no career is built in isolation. The
relationships that anchor us at home often provide the resilience and
perspective we need in business. Success, in life and in real estate, rests not
only on the deals we make but on the people who walk with us through the
journey.
Every thriving Southern California manufacturing or
logistics company started somewhere—often at a kitchen table or in a garage.
What happens between that first spark of an idea and the eventual decision to
sell the company is a fascinating—and often overlooked—journey. The
throughline? Real estate.
The Stages of Business Growth and Real Estate
Decisions
The Idea Stage. Home-Based Operation. Most
businesses start small. At this stage, real estate decisions are limited—but
the dream of expansion is already forming.
Lease vs. Buy. The First Big Decision
As soon as a company outgrows the home, it’s time to
lease or buy space. Leasing provides flexibility, but ownership plants the
first seeds of wealth building.
Owning Your Building. Many family operators
eventually buy the building they occupy. This decision transforms monthly rent
payments into an appreciating asset that can outlast the business itself.
Growth Through Expansion or Acquisition. Success
brings complexity—hiring more people, adding machinery, opening new locations,
or acquiring competitors. Each move requires thoughtful real estate strategy.
Exit Planning and the Role of Real Estate.
Eventually, founders face succession or sale. If selling to a strategic
operator, the real estate may be carved out of the deal. If selling to private
equity, the real estate is often critical to their investment thesis.
The Hidden Lesson
In many cases, I’ve seen the real estate owned by
the business worth far more than the operation itself. That building becomes
not just a workplace but a long-term family asset, a hedge against business
cycles, and a powerful vehicle for generational wealth.
Closing Thought
The journey of a family-owned business in Southern
California is never just about products, people, or profits—it’s also about
property. Whether starting in a garage or exiting through a private equity
sale, real estate is the silent partner that can shape the legacy of a business
for generations.
Allen C. Buchanan,
SIOR, is a principal with Lee
& Associates Commercial Real Estate Services in Orange. He can be reached
at abuchanan@lee-associates.com or 714.564.7104. His website
is allencbuchanan.blogspot.com.
