Anyone having a financial interest in commercial real estate needs to know if potential environmental problems may involve them in costly cleanup and lengthy litigation. The burden is on lenders and prospective property owners to make a duly diligent effort to research the environmental hazards on the property they acquire title to, foreclose on, maintain a security in or assist in managing.
When working with property buyers, sellers and lenders, the AESI team routinely performs Phase I Environmental Site Assessments to evaluate potential and existing hazards. This assessment is an essential element in establishing “innocent landowner” status in property transactions. It is the first step in evaluating a property’s environmental status and can help limit ultimate liability should the property be found to pose an environmental risk.
Allow Sufficient Time for a Thorough Evaluation
There are numerous concerns that brokers need to be aware of in order to assist clients in working effectively with an environmental consultant on a commercial or industrial property transaction. For starters, prospective property buyers should engage an environmental consultant immediately upon execution of the contract. It is critical to determine at the outset if the environmental consultant routinely works in the state where the property is located, and that they maintain the licenses and certification required to address any problems that are discovered.
Sellers, their brokers and other agents should anticipate that any buyer will perform a thorough evaluation and may choose to address known issues in advance. Therefore, it’s important to ensure that the due diligence period provides sufficient time for the performance of a thorough assessment, and allows for time extensions if recognized environmental conditions are discovered.
Establish an Appropriate Cost Estimate
When the environmental consultant submits a cost estimate for proposed remediation services, make sure it is clear whether or not there are any post-closing, long-term monitoring obligations of the seller that the buyer will inherit – and if the costs for those obligations should be negotiated between seller and buyer. Keep in mind that the seller may be able to complete remediation post-closing utilizing an access and escrow agreement.
Establish whether or not 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.
When contamination is encountered, brokers will need to verify if it is “discreet” and can be managed during a finite period; or comingled with a neighbor’s problem which would either 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, clarify whether or not the buyer may be exposed to potential litigation.
Development Plans May Raise Additional Concerns
The buyer’s future plans for the property may raise additional concerns. If demolition is planned, the buyer may need to request that the consultant 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:
- If 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.
- Whether or not 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’s important to remember that purchasers of commercial property can establish protections under the law only if they hire a qualified environmental consultant to perform a Phase I Environment Site Assessment that complies with the established ASTM Standard E1527-13 as well as the “innocent landowner” requirements of the state or jurisdiction involved. Unfortunately, we’ve seen many instances where buyers have been hit with excessive remediation costs that were discoverable pre-purchase and provable with a simple review of public information such as historical aerial photos, fire insurance maps and copies of environmental reports available through state agencies.
Working with an experienced environmental consultant will arm a prospective property buyer with critical information and appropriate cost estimates for remediation, which can be negotiated to the satisfaction of all parties – without jeopardizing the deal.