While it is impossible to avoid risk altogether, minimizing environmental risk before acquiring property is possible.
It could have been worse.
That’s not a very comforting viewpoint when dealing with an unexpected problem on your property. The more likely thought is, “Why me?” Simple math dictates the more properties you have in your portfolio, the higher the risk of encountering a problem. So, the better thought might be, “Why not me?” or “How can I avoid it being me?”
Environmental Site Assessment (or ESA)
Over the years, the environmental consulting industry has developed a widely recognized process for evaluating properties for the possible presence of environmental impairments. That process starts with an aptly named Phase I Environmental Site Assessment (or ESA). The ESA involves a visit to the site to observe existing conditions, a review of the historical uses of the site, and a review of known releases in the site vicinity to check for off-site sources of contamination.
The ESA Process has evolved over the last few decades to include more and more sources of information. In 2005, the U.S. EPA issued a rule defining what Congress meant when it used the term “all appropriate inquiry” as it relates to qualifying for the “innocent landowner” defense in the Superfund Amendments and Reauthorization Act (SARA). The American Society for Testing and Materials (ASTM) updated its ESA protocols to match the EPA rule, resulting in an update in 2013, the ASTM Standard E-1527-13, Standard Practice for Environmental Site Assessments. It is the industry benchmark for an ESA. If you want to avoid buying somebody else’s mess, the place to start is having a qualified consultant perform an ESA compliant with ASTM Standard E-1527-13.
If the ESA identifies a potential for contamination, the next step is to conduct a Phase II. Phase II investigations are much more variable than an ESA. While there are standard procedures for performing specific Phase II tasks, the types of contamination thought to be present determines the process. This circumstance is where the environmental consultant earns his pay.
To properly evaluate a site, the consultant selects investigative methods that are right for both the type of contaminant and the geologic conditions at the site. Deciding on the right consultant is probably the most critical step in the Phase II process. In fact, it can be the difference between an efficient investigation providing the information you need to manage your risk and wasting a bunch of money on useless data.
Timing is Everything
Timing is essential when performing environmental investigations. Escrows often have 30- to 60-day windows for conducting due diligence activities. Typically, an ESA takes two to four weeks and a Phase II can take four to six weeks. It does not leave much time for considering your options should your consultant find something significant. However, postponing the Phase II until after escrow puts you at considerable risk if encountering adverse conditions.
Options for Contamination
An adverse finding in an ESA or a Phase II does not necessarily mean the end of the line for an acquisition. Opportunities exist for addressing the cost of contamination and minimizing environmental risk. Common options include:
- Setting up an escrow account to hold money from the sale of the property to pay for the cost of the cleanup, while maintaining the sale price at the uncontaminated value;
- Reducing the sale price of the property by the projected cost of the cleanup, and having the buyer be responsible for the cost of the cleanup; and,
- Postponing the close of escrow until adequately addressing all environmental issues.
Of these options, the first seems to be the fairest to all parties involved. It provides a means of financing the cleanup using the value of the property.
A wide range of cleanup strategies is available. In fact, the right cleanup option for a particular site is based on the type of contaminant, the proposed end-use of the property, the geologic conditions at the site, and the time available for treatment. Also, administrative issues are significant. While encapsulating contamination on a lot may be permissible from a regulatory perspective, obtaining financing to develop such a property can be difficult.
Getting the right consultant involved early in the process saves time and money in the long run. A quality consultant should have:
- a wide range of investigative experience;
- be knowledgeable about the cleanup processes and their consequences;
- work well with other members of the development team (owner, engineer, attorney, and financier);
- have a good relationship with the regulatory agencies; and,
- be able to communicate effectively in writing. (A well-written report adequately documenting the investigation and cleanup activities reduces the hassle involved in future deals involving the property.)
Earth Systems Example Projects
Earth Systems has been involved on the tail-end of several projects encountering nasty surprises where minimizing environmental risk proved essential.
Example 1 included an agricultural property where cleaning of a DDT spill involving three acres of farm buildings cost more than $1 million. In this instance, the buyer performed an ESA. However, they postponed the Phase II for several years while working out the development plans and permits. By the time the Phase II results were known, the seller had vanished.
Example 2 involved a bank that repossessed a manufacturing facility. Later, they discovered the former tenant left behind 700 drums of assorted product and waste. It cost them almost $200,000 to remove.
As awful as these two examples sound, they could have been worse. At the farm, only 5% of the total site was affected. Also, the contamination only extended to a depth of about six inches. For the bank, illegal disposal pits in the rear of the property turned out not to contain hazardous wastes (just empty drums and plastic). While the farm owner and the bank probably consider themselves to have been unlucky, minimizing the risk of environmental contamination is more than just luck. The right approach, the right consultant, and a willingness to complete the investigation in a timely fashion reduces your chances of buying somebody else’s problem.
Note: Earth Systems originally published this article in a newsletter in 2009 and re-edited it for the web.