The developers who placed the Missoula Mercantile under contract last year with plans to renovate the historic property backed out of the deal after learning that additional asbestos work would be required to complete their project.
Stephen Glenn and Dario Passalalpi of Reno, Nevada, announced their intention to purchase the Mercantile in late October. The announcement followed with several months of due diligence and the contract was expected to close this spring.
Glenn said they were moving toward the financing phase when he learned the building still contained asbestos. He said the discovery came as a surprise, and it prompted the developers to back out two weeks ago when efforts to renegotiate the purchase failed.
“There’s hundreds of thousands of dollars of abatement that has to be done before anyone who’s going to do any true rehab work can start,” Glenn said. “The building really needs to be resurveyed from the ground up by an impartial surveyor.”
The failed deal continues the saga for the challenged property, which has sat vacant in the heart of downtown Missoula since Macy’s closed in 2010.
Octagon Capital Partners of Virginia purchased the Mercantile for roughly $2.3 million in 2011. Abatement Contractors of Montana was hired to do the asbestos removal, which took place over 2012.
During that time, Octagon received a low-interest Brownfields loan from the city worth $638,000 to help abate the property. The company said the work was done in 2013 – completed at a cost of $1.2 million.
“Octagon initially gave us a scope of work of what they wanted in the remodel of the building,” said Tanya Chemodurow, president of ACM. “All of the asbestos impacted by their planned remodel was removed.”
The U.S. Environmental Protection Agency contracted URS Corp. in 2011 to conduct a Brownfields study on the property. The firm collected 407 samples representing nine material types throughout the building.
Asbestos was found in 89 of those samples.
According to the ensuing report, the flooring material, the window calking, roofing tar, pipe insulation, decorative panels and joint compound for drywall contained asbestos. Chemodurow said ACM removed the items in accordance with Octagon’s renovation plans.
“The report did say the roof of the building contains asbestos, and that was never remediated, and everyone knew that was there,” Chemodurow said. “Octagon had no plans with the roof, but the potential buyers’ plans would have impacted the roof. At that point, the (asbestos) in the roof would have needed to be removed.”
Chemodurow disputed Glenn’s claims that additional asbestos work would cost “hundreds of thousands of dollars” to abate, though she said it wouldn’t be inexpensive.
Aside from the roof, the penthouse and a vintage cooler in the basement, she said the building is otherwise free of asbestos. The penthouse and the cooler were deemed historic and left in place, as Octagon didn’t plan to disturb them during renovation.
But Glenn said he and Passalalpi weren’t told about the asbestos. They entered the contract believing that abatement had been 100 percent completed.
“Pretty much nothing we were told about that building was factually correct,” Glenn said. “The building really had been represented as being abated. To us, abated means fully abated.”
Nancy Harte, the senior grants administrator and Brownfields coordinator with the Missoula Department of Grants and Community Programs, said the project was cleaned to a standard that met Octagon’s redevelopment goals.
Those plans were moving forward until the recession hit and scuttled the project.
“Abatement happens based on what they want to redevelop it into, and it may be completely different from what these new buyers wanted,” said Harte. “Within the scope of what Octagon asked ACM to do – and what Northern Industrial Hygiene confirmed – they had done a good job and cleaned it up to the level they wanted them to.”
Harte and others noted that asbestos is only harmful if it’s disturbed. In old buildings, if the asbestos is left in place, it can remain on the property. They said Octagon removed asbestos from areas it planned to remodel, and the air tests came back clean once the work was done.
But the new developers had a vision that took the renovations further than what Octagon had intended. It was during their due diligence that they learned additional abatement work would be required.
“One of the big pieces that was not abated was the roofing material,” said Ellen Buchanan, executive director of the Missoula Redevelopment Agency. “That would be driven by the decision to put a new roof on the building, and Octagon did not make that decision. That’s a renovation decision there.”
News that the Mercantile had been placed under contract last October after sitting vacant for so long electrified Missoula’s downtown district. Word that the contract had fallen through hit just as hard.
The building remains on the market, listed at $4.5 million by ZillaState Realty. Buchanan remains optimistic that another buyer will step forward.
“There are other people who have shown interested in the building,” said Buchanan. “There were people who were showing interest in the building when (Glenn and Passalalpi) tied it up with their contract. When the time is right, somebody will step forward and do something with the property.”
The building remains eligible for various incentives. Buchanan said it lies within an urban renewal district, making it a candidate for tax increment financing.
Historic tax credits remain intact as well, and depending on the renovation plans, it may be eligible for other grants.
“If a developer puts housing in it, there’s a lot of housing grants and things we run through this office that could help pay for that,” Harte said. “We work with so many different sources of funding, it kind of depends on what the project is going to look like.”
Glenn and Passalalpi said they attempted to renegotiate the deal after they learned that asbestos remained on site, but they said Octagon wasn’t interested.
Octagon and Zillastate Realty couldn’t be reached for comment.
Glenn said he remains interested in the Missoula market and will consider other local projects in the future. He also praised the city’s development arm for its work, saying it was among the best offices he’d worked with.
“We’re not going to point any fingers,” he said. “Based on the information we were provided with, maybe some assumptions were made, and our assumptions were wrong. None of this is onerous in and of itself, unless you’re not aware of it.”
The money out of pocket is painful, Glenn added, but money wasn’t the issue.
“We basically lost six to eight weeks of our due diligence time messing with something we thought had been taken care of,” he said. “We like the building and we love the market, but in the end, the seller wasn’t willing to come back to the table.”