Great info on environmental risk when purchasing commercial real estate.

Buying Commercial Real Estate? Don’t Get Stuck Having to Clean Up the Mess!

Article By Gail Brown, JD, Associate Vice President, GPE Commercial Advisors

If you are considering purchasing commercial real estate, you should also consider retaining an environmental professional to survey the property. The purposes of such a survey are both to make sure you are not purchasing a contaminated asset, and to protect yourself from liability for the cost of cleanup in the event that contamination is later found.

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Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), someone who purchases contaminated real estate may be liable for the cost of cleanup of that property even though he did nothing to cause the contamination and even though he did not know when he purchased the property that it was contaminated. Moreover, liability is what is referred to as “joint and several”, meaning that, if there are multiple parties responsible for cleanup (such as you as the current owner and the person or entity from whom you purchased), each one of them is responsible for 100% of the damages. Thus, if contamination is found on property you purchased, you could be responsible for 100% of the cost of remediation and your only remedy will be to sue the seller for contribution. If the seller cannot be found or is insolvent, you are up the creek without a paddle.
Under CERCLA, there is a defense against liability for persons determined to be “innocent landowners.” In order to be found to be an innocent landowner, you must show that the contamination occurred prior to the time you purchased the property, that you performed “all appropriate inquiries” prior to purchasing, and that you did not know or have reason to know of the contamination.
Often, the type of survey obtained and the depth of the investigation is lender driven; that is, if you are obtaining a loan for the purchase of the property, the lender will specify what type of investigation it requires. Its decision is based on ensuring that its collateral has value, not protecting the borrower from liability.
In limited situations, the bank may require nothing more than a Transaction Screen Process. Transaction Screen’s are becoming more and more rare but may still be accepted by some banks if, for example, the loan amount is small and the property is at low risk for environmental contamination, such as native land in an area the bank believes has not been previously developed. A Transaction Screen consists of limited historical research and government record review, a site inspection and a Transaction Screen questionnaire that is completed by the property owner and occupant. It is often conducted by an environmental professional but, unlike a Phase I environmental survey, can be conducted by anyone, including the bank, a property owner or a broker. A Transaction Screen Process offers no protection against CERCLA liability.

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In most situations, the bank will require that a Phase I environmental survey be conducted by an environmental professional. During a Phase I, no soil, groundwater or building materials sampling or analysis is done. Completion of a Phase I involves four-steps. First, the examiner will conduct interviews of the current owner and tenant, and adjacent property occupants, to determine how the subject property was used and what contaminants may have been present on or near the property. Second, the investigator will do an on-site inspection to look for evidence of potential contamination, such as industrial products or chemicals on the property, patched drains and noxious odors. The third step in a Phase I survey involves historical research. During this stage, there are several sources the examiner will consult, including: Sanborn fire-insurance maps, produced from 1866 to 1963 to identify fire insurance risk factors in buildings in certain urban areas of U.S. cities;historical aerial photography to determine prior uses of the site and nearby property; local building and fire departments to determine what historical building and underground storage tank permits have been issued; and, hydrological, topographical and geological data to evaluate the risk of migration of contaminants from nearby areas through the soil. And finally, he will consult a reverse telephone directory to identify prior tenants of the property and thereby glean their potential uses. The final stage of a Phase I is to consult state and federal environmental databases to determine if, for example, the subject property is in the vicinity of an identified brownfield site, has been the subject of corrective action directed pursuant to the Resource Conservation and Recovery Act due to hazardous waste being generated on the site, is a state or federal Superfund site, is listed on a state or national database as the site of a toxic or chemical spill or accident, or has underground storage tanks that were previously reported as leaking. In the Phase I report, the examiner will give findings and recommend whether a Phase II environmental survey should be conducted.
The purpose of a Phase II survey is to determine if contamination does in fact exist. During this inspection, the examiner will obtain representative soil samples to screen for chemical or metal contamination. In addition, there may be vapor gas sampling, surface or ground water testing, and mold, asbestos, lead based paint or radon testing.

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Once it is determined that contamination exists and needs to be remediated, a Phase III will be conducted to define the vertical and lateral extent of suspected contamination and to develop and implement a remediation plan. This may include, for example, excavation of a portion of the land or cleaning of a drywell.
drumsIf there is extensive contamination, a Phase IV survey is conducted to develop a long term remediation plan. An example of contamination that would require a Phase IV survey is groundwater contamination resulting from an industrial spill or illegal dumping of contaminants. A Phase IV remediation plan may take years to implement and cleanup generally occurs until verification samples show contamination within governmentally acceptable standards.
If you would like to discuss environmental risks of your property or a property you are considering purchasing, please contact Gail Brown, JD.
Many thanks to Jay Turk, President of RAL Consulting, Inc., and Dave Madsen, President of Preferred Environmental, for the invaluable information used in the article. To view RAL Consulting’s website, click here.

Article By Gail Brown, JD, Associate Vice President, GPE Commercial Advisors

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