Heed Environmental Issues Early in Real Estate Transactions

It is a familiar scenario. A business owner decides he needs to expand his operations to accommodate an increase in orders. He contacts a real estate broker, has his existing commercial property appraised and listed, finds a new location to move into, signs a purchase and sales agreement and schedules a closing.

His broker finds an interested party for his existing location and all parties agree on a price and a closing date. As the closing date approaches, the business owner decides he will need to obtain financing to consolidate other business debt. He and his bank agree to the terms of a loan which is subject to a satisfactory environmental site assessment (ESA) for his existing commercial property.

He had heard from an associate that Phase I ESAs only take a few weeks to complete, so he focuses his attention on more pressing business issues. Besides, he’s owned the property for 15 years and has always properly managed the small quantity of hazardous waste that his business generates. The weeks fly by.

Three weeks before the closing, his loan officer runs through the pre-closing checklist with him and the owner realizes he completely forgot about the Phase I ESA. He scrambles to find an environmental consultant who can accommodate his tight schedule.

Without the time to check references and research the process, he hires the first consultant able to meet his schedule although he must pay a premium for the expedited service.

After completing the Phase I for his existing property, the consultant informs the owner that a Phase II ESA is warranted due to regulatory files for the site referencing a potential abandoned underground storage tank (UST).

Although the owner was unaware of any USTs at his facility, he postpones the closing date and authorizes the Phase II work which will require six weeks to complete. Although a UST is not found, drilling and analytical testing of soil samples reveal concentrations of petroleum in soil that exceed numerical criteria listed in Rhode Island Department of Environmental Management’s (RIDEM) Remediation Regulations.

Further complicating matters is the detection of solvents in groundwater samples from the site. Under RIDEM regulations, the owner now has 15 days to report the discovery of the contamination. After completing a Site Investigation Report, preparing a Remedial Action Work Plan and implementing remedial actions, the business owner finally has his letter of compliance from RIDEM.

This owner’s experience with the pitfalls of putting off environmental due diligence during a commercial and industrial property transaction took only eight months to resolve and cost the owner his buyer for his existing property as well as his P&S agreement for his prospective property.

Those in the business community who have completed property transactions within the last 10 years may not be surprised by this scenario. Most are familiar with the horror stories of clean-up liability established by the federal Superfund Program and may be aware of the almost universal requirements lenders have for completing ESAs.

What businesses may not appreciate is the inordinate amount of time that can be required to resolve environmental issues once they are discovered. The process of investigating commercial and industrial properties to determine whether a release of hazardous materials has impacted underlying soil or groundwater quality can take from three to twelve weeks depending on the complexities at a particular site.

However, if contaminants are detected in soil or groundwater at levels that exceed RIDEM’s criteria, the process of remediating and obtaining a no further action letter or letter of compliance from RIDEM can take up to six months in the best of cases, years if you’re really unlucky.

The point to be made here is that for those business owners with plans to buy or sell commercial or industrial real estate in the forseeable future, there are many distinct advantages to starting the process of reviewing environmental conditions early, not the least of which is maintaining your sanity.

Planning ahead will also allow extra time for the slow process of regulatory review of sites that are jurisdictional to RIDEM. Knowing if your commercial or industrial property has been impacted by contaminants in soil or groundwater will allow you the time to make informed and cost-effective decisions about site cleanup which in turn will allow you to dovetail cleanup remedies with future development alternatives.

If contaminants are encountered and you have the time, you may be able to locate a buyer with experience in redeveloping environmentally impaired sites or who has a development plan well suited to a particular site’s conditions.

If, as an owner, you’re worried about finding something you would rather not deal with, keep in mind that you will end up dealing with it sooner or later. By proactively assessing the environmental conditions of a property, the degree and extent of contaminants present can be relayed to potential buyers, thereby increasing their comfort level and the likelihood that a deal can be negotiated.

Completing environmental due diligence early in a commercial/industrial real estate transaction will also provide everyone involved with the luxury of time to make informed decisions which will likely reduce the stress level of everyone involved.

This piece was written by David Hazebrouck, a licensed environmental professional based in Cumberland, RI. Mr. Hazebrouck, the principal of Lake Shore Environmental, Inc., specializes in assessing and remediating commercial and industrial real estate throughout Southern New England.