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Martin Cranshaw has been looking for a well-located site for a new restaurant that he plans to open.
Martin Cranshaw has been looking for a well-located site for a new restaurant that he plans to open. After an extensive search, he identified an ideal location at the intersection of A1A and a well-traveled road. Following some difficult negotiations, Martin bought the property for $750,000.
On the site was a vacant gasoline station, which was last rented out to an automobile mechanic who operated it as a transmission replacement shop. That tenant only used the service bays and the office space; no gasoline was sold nor were the underground gasoline tanks used.
Martin both the property with the intent of demolishing the gasoline station, which did not suit his needs for the restaurant; instead he planned to construct a new building on the site. Bids obtained for the demolition ranged from $15,000 to $25,000. The cost of the new building was estimated to be between $700,000 and $800,000.
In the process of obtaining the necessary permits for demolition, Martin learned of a governmental regulation that requires abandoned underground gasoline tanks to be removed and disposed of when former gasoline stations are demolished. In addition, the regulation requires that any soil contamination that might have eventuated from a leaking tank be treated by refining the soil. He also learned of new environmental regulations that would prevent him from building on the property, unless he could show that he was just renovating an existing structure. His architect informed him that the way this was usually done was by leaving one cement block wall of the building up and building around it or incorporating it into the plans. This additional architectural cost to allow for permits of an existing building renovation and reworking of the architectural plans would add an additional $75,000 to the cost of the restaurant.
The lowest cost estimate Martin was able to obtain for removing and disposing of the three underground takes totals $60,000 and if the refinement of the soil was necessary, another $40,000 would be required.
Required:
- How should Martin recognize the costs of demolishing the gas station, removing the abandoned underground tanks, refining the soil, and the added renovation permit and architectural changes?
- If you assume that Martin Cranshaw had been aware of the regulations when purchasing the property, how should he recognize the costs?
