Many turnaround experts believe that the key to fixing a distressed manufacturing company requires quickly turning assets, including idle factories or other underutilized facilities, into cash while simultaneously reducing expenses. However, selling a factory may not always be the best way to obtain value or minimize the costs associated with that asset.
For companies with older, larger factories in high-tax municipalities, turnaround managements often have the belief that the best option for minimizing costs is to shut down and sell the facility. Unfortunately, for older special-purpose buildings, waiting for a sale can often cost up to $3 million per year in holding costs—at a time when the company can least afford it. Plus, large industrial buildings can take years to market and sell. On the other hand, moving quickly to shut down a plant and sell its equipment, even if just for scrap, followed by demolition decreases holding costs and can even generate a positive cash flow.
Selling Property
When making the decision to sell or demolish a plant, consider the following factors:
- What are the reasons that the factory is being considered for closure? Is it too expensive to manufacture in this location? Will it be any cheaper for a potential buyer to manufacture in this location?
- What are the property taxes and local labor costs? If this is driving the reason for selling, will they be any cheaper for the buyer?
- What would the potential buyer do with a building of one million square feet when many, if not most, manufacturers today require only 50,000 to 75,000 square feet for operations?
- Can the property be converted to a storage facility, which usually requires a truss height of 35 feet or more?
- Is the current local economy conducive to development of the plant for other uses?
- What are the holding costs for this property while marketing it for sale?
- What is the expected selling price of the property, especially relative to its holding costs? What is the likelihood that the expected selling price can be achieved?
The answers to the first five questions will indicate how long it will take to market and sell the building. The answer to the last two questions tell how much it will cost during that period relative to the potential proceeds from selling the property. This estimate of the net recovery on sale needs to be a factor in deciding the best course of action.
Typical holding costs include heat, electricity, security, building maintenance, property taxes, property insurance and idling expenses, with heat, electricity and building maintenance being the major holding cost components. Ensuring that the property is insulated, internal and external lights are functional, fire-suppression systems are operational and the grounds are maintained is required of most local safety and security requirements and also help maintain “curb appeal.” To deter theft of facility contents or vandalism and fulfill property-insurance requirements, most facilities must also retain around-the-clock security personnel. Although each municipality is different regarding property taxes, most municipalities assume that 80 percent to 90 percent of tax revenue for the site relates to the building. Some jurisdictions also assess additional taxes for machinery and equipment. In addition to these expenses, there are idling activities that are incurred whether the facility is for sale or being prepared for demolition. The Resource Conservation and Recovery Act (RCRA) mandates that hazardous waste must be off-site within 90 days once production ends. If this timeline is not met, corrective action will be mandated and additional costs or fines incurred. [1]
Decommissioning and Demolition
After considering the holding costs involved for sale of the property, consideration should be given to decommissioning and demolition (D&D) of the building. The cost of every D&D project involves a trade-off between the environmental decommissioning and waste-disposal costs and the recovery benefit of the scrap equipment. In many cases, the recovery benefit can be more than the cost.
Demolition costs focus on the “lifecycle” of the property and how to “bring it to rest.” What was the manufacturing or engineering purpose of the property? When was it constructed? What types of modifications were made and when? What materials were used? Do the materials meet current codes and regulations? If not, how do these materials need to be handled safely and within regulatory guidelines?
For instance, asbestos, which was widely used in properties erected prior to 1977, is a material that needs to be looked at carefully. Asbestos-containing materials (ACM) are generally categorized into friable (risk of becoming airborne) and nonfriable. Forms of ACM include vinyl floor tiles, sheeting, adhesives, roofing tars, felts, siding, shingles, transite panels, caulk, gaskets and HVAC insulation. There are very specific regulations regarding the abatement of ACM and its disposal, with not only environmental regulatory agencies involved, but also the Occupational Safety and Health Administration (OSHA).
The amount (and cost) of environmental cleaning (EC) and hazardous-waste disposal that need to be done is also dependent upon when the building was erected. The RCRA and Toxic Substances Control Act (TSCA) define more than 75,000 chemical substances as hazardous waste, plus requirements for their safe removal and disposal. Examples include polychlorinated biphenyl (PCB), lead, mercury, radon and ACM. PCB materials were used in coolants and insulating fluids; plasticizers in paints and cements; stabilizing additives in flexible polyvinyl chloride (PVC) coatings for electrical wiring and electronic components; cutting oils, lubricating oils, hydraulic fluids; and sealants (for caulking in schools and commercial buildings). [2] Spills in factories that occurred decades ago all but certainly contained PCB, and contaminated the plant’s concrete or wood floors, creating a TSCA waste.
However, even with these types of D&D costs, the net cost to the owner of the factory can be less than zero—if the demolition contractor pays to take down the building. Scrap metal recovery and equipment sales can drive very large returns to the owner and the contractor.
Conclusion
Sometimes not having assets makes more sense than having them and this is often the case for companies with older, larger buildings that are no longer needed. Smart management teams that carefully weigh all options and compare costs may find that D&D is actually a more profitable course of action than pursuing the sale of an idle facility.