FOUR COMMON MISTAKES IN DUE DILIGENCE

Would you buy a used car without knowing its history or current condition?  If not, why would you invest your valuable dollars in a Property without knowing the associated historic and current chemical use and storage?

The Phase I Environmental Site Assessment ( ESA ) process allows a user to make a more educated business decision on a Property.  Being aware of the environmental business risks is just good business sense.  In short, is the Property actually worth the price I am about to pay?  If not, this knowledge could allow you to renegotiate the price and allow the transaction to continue without a large financial loss to your business. 

While additional knowledge is helpful to you, incorrect or incomplete data can cause unnecessary delays or problems.  The following is a few of the common due diligence mistakes we have seen.

1. Don't Just Concentrate on the Obvious Environmental Risk

Often property purchasers and consultants examine a Property with a focus on the obvious.  When an obvious environmental concern is immediately apparent (e.g., battery recycling), one must not ignore looking at the history of the Property for other issues.  The undiscovered historic UST can cause building delays, cause the need for additional investigation, and cost you money. 

2. Where is the Property?

Know the boundaries and location of the Property.  We have seen numerous examples where only a portion of the Property or large portions of the adjoining properties were inspected.  We have been brought into projects where issues located on a site up to one mile away from the Property were misidentified by a company as being on the Property.  We have also been involved in projects where issues that were clearly located on the Property were identified as located off site.  It is easy to see how these errors can cost you money.

3. Use Qualified People

Not all environmental consultants are equal.  Too many times we have seen a geological interpretation on a property that is clearly incorrect.  Since geology often determines the appropriate cleanup criteria, a misinterpretation in geology can be disastrous.

4. Poor Interpretation of Data

Aerial photographs and fire insurance maps are data sources that are often misinterpreted.  We have seen water connections on fire insurance maps interpreted as underground storage tanks and gas stations on aerial photographs not identified.

Additionally, we get calls every month from clients who are purchasing historic gasoline stations that have closure documentation.  These clients are often led to believe by the seller that with this closure documentation on a leaking underground storage tank (LUST), a Phase I ESA update will clear the way to a bank loan so they can get the Property up and running.  However, often the closures were not audited by the state regulators, the soil borings were not placed in the proper locations, insufficient parameters were tested, and other uninvestigated issues exist on the site.  Buying a property like this can lead to business delays, unexpected expenses and liabilities, and clean-up costs.

Assemble Your Team

A qualified team can avoid unnecessary delays.  Each member on the team has an expertise.  Typically the property purchaser, attorney, banker, engineer, and geologist each provide a different perspective on the environmental issues.  Working together typically assists in the successful outcome of the transaction.  Additionally, it should be noted that on some projects, an attorney can provide an extra layer of environmental protection for a buyer or seller.

In conclusion, we often hear, “the bank is just giving me a hard time.”  Yes, the Bank is trying to protect their investment; however, a side benefit is they are also protecting you from buying a property with liabilities that could affect your business and cost you tens-of-thousands of dollars to rectify.

With the anticipated changes that include additional documentation and increased liabilities associated with the Environmental Protection Agency’s All Appropriate Inquiry ( AAI ) legislation expected to be adopted in the fall of 2005, proper due diligence will be essential and help avoid costly mistakes. 

Mr. Lawton is the manager of the Property Transaction Group at The Dragun Corporation and has 14 years experience in environmental consulting.  His responsibilities include the management and conduct of Phase I Environmental Site Assessments (ESAs), Phase II ESAs, the writing of Baseline Environmental Assessments, and Due Care Analyses Plans, and the field coordination of large high-profile RCRA and Part 201 of the Natural Resources and Environmental Protection Act 451 environmental site assessments.  Mr. Lawton has conducted numerous real estate assessments of industrial, manufacturing, commercial, and private properties in Michigan, Illinois, Texas, Indiana, and Canada.  You can reach Mr. Lawton at (248) 932-0228 or by email clawton@dragun.com.

 Dragun Corporation^© 2007

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