Knowledge Is Money: Limit Environmental Liability by Performing Due Diligence
When it’s time to purchase commercial real estate properties, failing to perform due diligence on a site’s potential environmental issues can be a costly mistake for a buyer.
That was one of the many important points outlined by a panel of environmental-liability experts in a recent episode of my “Commercial Real Estate Show.” The episode provided an enlightening look at the many environmental issues confronting buyers and sellers of commercial real estate, including Phase 1 Environmental Site Assessments, risk mitigation and vapor intrusion.
Look Before You Leap
When considering a property purchase, a potential buyer should always perform due diligence on potential environmental issues and give itself plenty of time to do so, the experts agreed. Otherwise, a property owner could eventually find itself saddled with exorbitant cleanup costs.
“There are horror stories out there,” said Robert Brawner, an environmental engineer and owner of One Consulting Group. “There’s a small Georgia town where a large industrial manufacturer bought a plant, didn’t do enough due diligence to find a problem and wound up with a $30 million environmental remediation issue.”
Lenders often require buyers to conduct a Phase 1 test to pinpoint any environmental-liability issues associated with a real estate asset; conducting the test also can provide Superfund liability protection.
A typical Phase 1 test takes about three weeks to complete and would cost the owner of a 2,000-square-foot commercial building about $1,500, Brawner said.
The parties involved in a transaction should allow ample time for a Phase 1 to take place; compressing the standard two- to three-week timeframe can force consultants to rush and perhaps miss some issue despite their best efforts, my guests noted. “The due diligence cycle got incredibly compressed in the fast and furious years of 2006 and 2007,” Brawner said. “Then [sales] slowed down [and] our due diligence periods expanded a bit. As of late, with a lot of the distressed assets coming out of the bank, there’s [an emphasis] on the quick close and that due diligence cycle has again gotten compressed.”
All Is Not Lost
The discovery of an environmental issue doesn’t mean a buyer should automatically walk away from a sale, said John Spinrad, an environmental attorney with Arnall Golden Gregory. “There are very few problems that can’t be solved if you allow enough time for due diligence because there are enough tools that we can use for dealing with risk – whether it’s insurance or a brownfields program,” Spinrad said.
A person or company looking at purchasing a gas station site should be especially careful and thorough, Spinrad cautions. That’s because state laws regulating the cleaning of underground gasoline storage tanks are relatively lax, which means the previous owner “could have met its obligation under the letter of the state law, but you can still end up with a thoroughly contaminated site that may not be safe for your future use or for future development,” he said.
Federal and state laws largely protect a lender who forecloses on a property from any environmental liability the site carries, Spinrad added. “The lender can have some comfort if it has to take back a contaminated piece of property,” he said. “Nevertheless, it’s still wise to do [environmental] due diligence before a lender takes back a property so that the lender knows what it’s getting into.”
A Growing Concern
An emerging environmental issue is “vapor intrusion,” said Ken Burrell, a managing partner of Synapse Services, a provider of environmental insurance. Vapor intrusion is the migration of volatile organic compounds from subsurface groundwater into the interior of a commercial building, where people can inhale them.
The entire episode on environmental issues and strategies is available for download at www.CREshow.com.
President, Bull Realty, Inc