Liz Davis, Director, Site Assessment – Remedial Investigatory Services
Pubished by Brownfield Insurance March 2009

Property sale transactions almost always require an investigation to determine if potential environmental issues exist at a property.  However, many owners, manage properties that were purchased before due diligence practices went into effect and may not be aware of the potential environmental issues that can impact a pending sale or the value of them.

Additionally, property owners/managers are often reluctant to spend money investigating and understanding the environmental quality of a property they currently own because any money spent doing so, reduces their annual profits, diminishes property value, and potentially disrupts current business operations.  Thus, the evaluation of the environmental condition of a property is often conducted as an eleventh hour afterthought during the sale of a property most of the time when a prospective purchaser must complete an environmental audit/assessment of the property in order to satisfy innocent purchaser company and their lenders requirements to secure financing.

Due to the myriad of environmental regulations that can potentially impact a property or business sale, and the time it may require to satisfy these regulations, this afterthought, more often than not, can cause extensive delays or, worse yet, jeopardize a pending transaction all together.

This can happened to you.  A retail strip mall is placed on the market and attracts several serious offers due to a full occupancy rate and the proximity of the mall to an affluent customer base.  In order to secure financing, the prospective purchaser retains a consultant to assess the property to identify potential areas of environmental concern (i.e. conduct a Phase I Environmental Site Assessment).  The assessment reveals a former dry cleaning establishment and a former automobile service operation that included the use of hydraulic lifts and an underground oil/water separator.  The due diligence period is extended to permit the buyer to perform a more intrusive evaluation through soil and/or ground water sampling (i.e. a Phase II Site Assessment).  The sampling reveals contamination associated with these uses at concentrations above regulatory standards.  The buyer is unable to secure financing until sign-off by a regulatory agency is procured and the deal falls through.  The property owner has lost its deal and is now saddled with an environmental liability.

Looking back, might it have been more prudent for the property owner to contemplate how environmental issues could have potentially impeded future business transactions?

In order to make certain environmental compliance requirements can be satisfied within the framework of a business transaction, a property owner and/or manager should consider evaluating their property prior to placing it on the market to determine if potential environmental pitfalls (a.k.a. potential areas of environmental concern) exist that may delay the progress of a pending transaction.  If the owner/manager is initially reluctant to spend money on an environmental consultant to conduct the evaluation, there are more obvious areas that can be evaluated by the property owner/manager.  These may include, but are certainly not limited to, the identification of:
 

Current Areas of Concern
•Existing underground storage tanks;
•Existing operations that utilize hazardous chemicals; and
•Existing operations that may be subject to transaction regulations (i.e. in New Jersey, operations that are subject to the Industrial Site Recovery Act).

Historic Areas of Concern
•Historic underground storage tanks (i.e. the property is currently heated by gas but was formerly heated by fuel oil);
•Historic agricultural use (the property has always been occupied by retail establishments; however, prior to its development, the property was an orchard); and
•Historic chemical use (when you purchased the property it had been a vacant building for several years; however, prior to that time, it was occupied by a metal fabrication operation).

If potential areas of environmental concern are identified, the property owner/manager should then consider hiring an environmental professional to conduct a more thorough investigation of the property to determine if additional potential areas of environmental concern exist. 

Once all of the potential areas of environmental concern are identified, further evaluation can be conducted, if necessary, to determine if adverse impacts (i.e. soil, ground water or indoor air impact at concentrations above regulatory limits) or regulatory compliance (i.e. permitting) issues exist.

The timely identification of contamination will hopefully provide the property owner greater latitude in finding an acceptable way to mitigate the problem within both their monetary constraints, as well as the existing regulatory framework.  Additionally, the early identification of environmental issues may ultimately save money in the long run by allowing a property owner to deal with the problem while the contamination is still localized (i.e. the longer contamination persists in the environment, the greater the chance for migration).

Even if the owner does not wish to mitigate the problem in its entirety before a sale, the accurate identification of the magnitude of the contamination may facilitate the establishment of an escrow account at the time of closing to provide a funding mechanism for mitigating the identified environmental issues or allow the purchaser enough comfort to assure the environmental liabilities associated with the site.

Ms. Davis is with EWMA’s Mid-Atlantic Regional Office in West Windsor, NJ.  She specializes in environmental assessments and remediation. For additional information or to discuss your concerns please contact Ms. Davis at 609-799-7300 ext. 107 or Liz.Davis@ewma.com.