Commercial real estate is risky business. Environmental contamination is one potential downside that buyers–and their lenders–must consider as part of a balanced and comprehensive risk management strategy. After over 30 years of evaluating environmental risk at all kinds of commercial real estate projects, I have identified a number of potential conditions buyers should look out for. Listed below are my top five environmental risks for property buyers that present the most potential for environmental remediation challenges, along with steps to take in order to mitigate risks to your business.
Properties with Environmentally Sensitive Activities
Underground Storage Tanks/Gas Stations
Petroleum-based businesses are notorious for causing the leakage, spillage, and migration of volatile organic compounds (VOCs). Underground storage tanks (USTs) and their related systems are a significant area of concern with these types of properties.
Modern UST systems at gasoline stations contain double-walled tanks and lines that are reinforced with fiberglass. Current safety regulations require features such as interstitial monitoring, leak detectors, and spill buckets to contain fueling and dispensing mishaps. While not a foolproof measure to eliminate leaks, modern UST systems are a huge improvement over historical steel tanks and lines that were subject to corrosion and had no leak detection or spill containment devices.
Gas stations are not the only facilities with USTs. Many commercial and residential buildings utilize heating oil that is stored in underground storage tanks. While heating oil is not as inherently toxic as gasoline, it does contain highly regulated chemical compounds.
Auto Repair/Maintenance Facilities
Auto repair shops often perform potentially troublesome services such as oil changes, parts washing, radiator flushing, painting, etc. Spillage and improper disposal of these materials could be highly detrimental to the property’s value.
In addition to gasoline-related VOCs, there are potential contaminant chemicals associated with the use of solvents, paints waste oil, and even heavy metals that are present in the waste oil.
Industrial Facilities
Properties with historical use as an industrial facility may harbor spills from process areas, chemical storage areas, and chemical dumping sites. Historically, common practices for waste disposal and even general housekeeping–which were generally acceptable at the time–might be unlawful today.
Many industrial facilities had waste lagoons and disposal pits that contained any manner of contamination. Before the 1970s, these practices were generally unregulated.
Commercial Properties with Leach Fields
Commercial properties with historic use of leach fields or drywells for wastewater disposal can be a harbinger of hidden contamination. It is not uncommon to find waste chemicals and materials were simply flushed down the drain. Accumulation of these materials in leach fields may represent an expensive and time consuming issue for the landowner.
Materials removed from leach fields are often classified as hazardous waste. Hazardous waste disposal can be expensive and highly regulated. Toxic materials may extend well beyond the boundary of the leach field.
Dry Cleaners
In recent decades, the common use of perchloroethylene (PCE) and VOCs in dry cleaning has been blamed for potentially significant human health impacts. According to studies conducted by the Environmental Protection Agency (EPA) and the State Coalition for Remediation of Dry Cleaners (SCRD), an estimated 75% of dry cleaning facilities currently in operation (roughly 22,000 sites) are contaminated. This estimate does not include the thousands of potentially contaminated sites that formerly house dry cleaners.
Steps to Mitigate Environmental Risks
The first step to mitigate environmental risk is to conduct a comprehensive environmental survey, beginning with a Phase I Environmental Site Assessment (ESA). A comprehensive investigation will include a records review, interviews with persons familiar with the property and surrounding area, and site reconnaissance by an experienced environmental professional.
A proper assessment will consider the current and previous uses of a property for indications of businesses that may have engaged in environmentally sensitive activities. The assessment will also review regulatory agency files. State environmental regulatory agencies maintain public files of citations, permits, tank registrations, and active investigations or legal actions.
The Phase I ESA should follow the most recent Phase I Standard, ASTM 1527. If the Phase I identifies a recognized environmental condition (REC), a Phase II ESA should be performed. Note: A REC is defined as the presence or likely presence of any hazardous substances or petroleum products in, on, or at a property. A REC doesn’t necessarily mean that there is contamination, just that it is possible.
The purpose of a Phase II ESA is to examine the REC to confirm the presence or threat of a release to the environment. The Phase II ESA may involve the collection of soil, groundwater, or air samples to determine if contamination exists and, in some cases, the extent of contamination.
If I buy a property, do I own the contamination?
In some cases, yes. That is why it is important to conduct a comprehensive risk assessment. If a properly conducted Phase I–and, if necessary, Phase II–ESA is conducted, the property buyer may be eligible for relief from liability through an “innocent landowner defense.”
If a property has existing contamination, should I cancel the purchase?
Not necessarily. As foreboding as these risks seem, property owners do have a few options at their disposal if potential site contamination is discovered. Full remediation isn’t always the only course of action. The use of deed restrictions and covenants may allow a certain level of contamination to stay in place if the property use is restricted to activities with a low risk of exposure. Although such restrictions are use-limiting and may impact a property’s market value, they can help reduce the cost of cleanup significantly.
Several states have established gasoline and dry cleaner remediation programs to help offset some of the costs of cleanup. Talk with your environmental consultant to help identify potential funding that may be available. A comprehensive, diligent assessment is the best way to help quantify the environmental risk in purchasing a property.
Watch out for these potential issues
Sites with History of Environmental Permits, Litigation, Enforcement Action
If you are purchasing a business associated with a property, it is important to determine that the proper environmental permits have been obtained and that permit conditions have been properly maintained and reported. If a business does not have the proper permits for the current industrial process or have the proper control technologies in place, the new owner could be liable for significant environmental compliance costs.
Just because an environmental issue was resolved to the satisfaction of a regulatory agency, it does not mean that the case cannot be reopened if additional information becomes available.
Example 1: The EPA has recently focused scrutiny on vapor intrusion. The EPA defines vapor intrusion as “a migration of volatile chemicals from contaminated groundwater or soil into an overlying building.” If indoor air quality results indicate a potential issue, the regulators agencies will require further assessment/remediation of soil and groundwater.
Example 2: Historically, the response to discovery of a leaking tank was often to simply cut the supply lines to the tank and dig another hole for a new tank. I have discovered former service stations with more than ten old tanks in the ground. Even though the seller has proper closure records, further investigation is usually warranted.
Contamination from Adjacent Properties
Environmental risks are not always dependent upon the current or past uses of the subject commercial property. In certain cases, potential contamination may emanate from an adjacent or nearby property, resulting in seepage or migration of volatile compounds, contamination of drinking water affecting a large area, or vapor intrusion. Adjacent landowners may not be financially viable or willing to investigate the source of contamination discovered on your property.
Recent Improvements
Pay attention to areas with recently replaced asphalt, fresh stone, or newly planted vegetation. Stains and distressed vegetation that are indicative of chemical spills can be hidden by these improvements. Or, improvement may have been made for appearance purposes. It is up to your environmental professional to decide if additional investigation is necessary.
Manage Environmental Risk
Due to spills and past disposal practices, hazardous and toxic chemicals have ended up in the soil and groundwater. The resulting contamination has the potential to compromise drinking water, impact indoor air quality, and spread to adjacent properties. The costs of a single cleanup can be significant, averaging between $200,000 and $2,000,000 and sometimes far exceeding that figure.
Comprehensive environmental assessments, conducted by experienced professionals, can help quantify the nature of those risks. The more sensitive the use of the property, the more effort will be involved to complete the assessment.
Regardless of the environmental issue, a property buyer’s best friend is a comprehensive and consistent environmental due diligence program. Talk with your qualified environmental risk management consultant for help with establishing a program that fits your specific institutional and market needs.
The stakes are high when dealing with EPA regulations. Make a mistake when purchasing a property and you could potentially be liable for the cost of an environmental disaster that you did not know existed. Understanding EPA regulations and all of their back references and guidance documents is a full-time job. That’s what we do. Contact us here to speak to one of our professionals!
