Commercial real estate property transactions can be impacted significantly when a buyer discovers environmental issues pre-closing. These issues can include leaking underground storage tanks, buried industrial waste, poor quality fill material, improper handling of hazardous substances, historic PCB usage, asbestos containing materials and other areas of concern.
For those with a financial stake in real estate deals, it is critical to determine if potential environmental problems will lead to expensive cleanup and possibly lengthy litigation. Engaging the services of a full-service environmental consulting firm is an important first step.
Atlantic Environmental Solutions, Inc. (AESI) is a full-service environmental consulting firm that addresses issues associated with the evaluation of commercial and industrial properties under due diligence. When working with lenders and property buyers, our team routinely performs Phase I Environmental Site Assessments (ESA) to evaluate existing and potential hazards. This is essential to establishing “innocent purchaser” or “bona fide prospective purchaser” status, which can help limit the new owner’s liability should the property be found to pose an environmental risk.
When to Retain an Environmental Consultant
Lenders should recommend that prospective commercial property buyers retain an environmental consultant immediately upon execution of the contract. In some cases it may be advisable for sellers or purchasers to engage the services of a firm like AESI before entering into a contract in order to facilitate a site review and prepare for possible exposure to risk.
Prior to engagement, the environmental consulting firm should describe its experience working in the state where the property is located. In addition, the company should maintain appropriate environmental licenses that might ultimately be required to address issues discovered during Phase I. The consultant should maintain an errors and omissions insurance policy with a limit of $5 million or more.
The Phase I ESA typically requires three to four weeks to prepare, and it can take longer if issues are discovered or files need to be retrieved. Starting immediately gives the consultant sufficient time to complete the assessment during the due diligence period, as well as to help the buyer negotiate time extensions if recognized environmental conditions are discovered.
Ultimately, the lender and buyer are interested in confirming whether or not issues exist and the cost estimate to remediate problems that are discovered. The borrower and the lender should work together with the consultant to map out any remediation work needed, determine if all can be performed pre-closing, and if the buyer will inherit any post-closing or long-term monitoring obligations of the seller. If so, the costs for those obligations may require negotiating between the seller and buyer. The seller may be able to complete remediation post-closing, utilizing an access and escrow agreement. The discovery of a problem need not kill a deal if addressed in a timely way.
Avoiding Excessive Costs and Other Post-Closing Issues
When contamination is encountered, remediation is essential to the successful completion of the property transaction. To avoid surprises down the road, it is important to establish whether the cost estimate for any required remediation is based on the collection and analysis of sufficient soil and groundwater samples or a broad estimate without the benefit of site data. In addition, determine if the estimate for remediation does or does not include:
- Post-case closure monitoring obligations and maintenance required by the agency. Costs related to restoring concrete, landscaping and other cosmetics damaged by the remediation.
- Any litigation costs expected to be incurred by the responsible party relating to neighbors that are adversely impacted or with other neighbors that are partially responsible for the same contamination.
Lenders should also make sure their clients verify if the contamination is “localized” and can be managed during a finite period or commingled with a neighbor’s problem. This may extend the life of the cleanup, increase the cost or both. If the seller’s remediation involves contamination migrating off site and under neighboring facilities, make sure it is clear whether the buyer may be exposed to potential litigation or be required to collect samples at the neighbor’s property.
Future Development Plans May Raise Additional Concerns
If the buyer’s future plans for the property involve demolition, they may need to request that the Phase I ESA include an evaluation for asbestos-containing materials or other considerations that are beyond the scope of the Phase I Environmental Site Assessment. Other key considerations to address up front include:
Whether or not the buyer’s plans involve construction of a new building over a portion of the property that is still the subject of ongoing soil/groundwater investigations.
If the buyer’s future use and occupancy can withstand a seller’s post-closing visits to the property to perform monitoring, investigations and possible remediation.
Will future development at the property be restricted in the event engineering controls must be employed to cap contamination.
It is important to keep in mind that purchasers of commercial property can establish protections under the law only if they hire a qualified environmental consultant to perform a Phase I ESA that complies with the ASTM standard as well as the “innocent purchaser” requirements of the state or jurisdiction involved. At AESI, we have seen many instances where buyers have been held responsible for excessive remediation costs that were discoverable pre-purchase and provable with a simple review of public information. A lender can help ensure their client is armed with critical information and appropriate cost estimates for remediation, which can be negotiated to the satisfaction of all parties without jeopardizing the deal.
