Arguably, there are dozens of potential pitfalls that you can encounter when you “assess” a commercial property. When the property is an industrial site, there are considerably more of these potential pitfalls that await an unsuspecting buyer/investor.
First, when I’m referring to a site assessment, it can be as “simple” as a Phase I/II Environmental Site Assessment (ESA) to something that may be significantly more involved, such as an assessment associated with a divestiture, a termination of a lease, or at the behest of a regulator. Regardless of the impetus of the ESA (for this space, we’ll focus just on soil and groundwater issues), there are potential pitfalls that can be very consequential… consequences that will, likely, adversely impact liability, timing of the deal, and financing.
Environmental Site Assessment Mistake 101: Underground Storage Tanks (UST).
The only thing more troubling than finding a UST on a property during an ESA is finding a leaking UST on the property. Right? Well, not finding it altogether can be even more troubling. USTs, by nature of being “underground,” are elusive… and the older they are, the more elusive they can be. Older tanks required less recordkeeping and less regulatory oversight. Also, aboveground visual “indicators” (dispensers, piping, fill ports, etc.) for older tanks are often gone or less prevalent. If a UST is “missed” during the ESA, it usually raises its head when it is, ultimately, found later after the sale. And while the UST, in and of itself is a pitfall, the soil and groundwater contamination that often goes hand-in-hand with a UST is usually more of an issue.
I recall one of my early Phase I ESAs. I did the site inspection, took the photographs, reviewed the State and local records, etc. When I was drafting the report, I looked closely at the records from the local fire department, and there was a brief reference to a UST. Not having identified a UST during my site inspection, I looked more closely at the photographs I’d taken and saw a vent pipe painted the same color as the building that was barely visible. There was nothing in the regulatory files, but there was most definitely a UST on the site. When assessing a property (i.e., Phase I ESA), make sure you look at all pieces of evidence (historical records, on-site inspections, interviews, etc.).
Depending on the integrity of the tank, what was stored in the tank, and the local geological conditions, missing this UST during the site assessment can be an expensive mistake. By way of examples, if the tank leaked product that had high vapor pressure (i.e., something highly volatile), the soil and groundwater issue may also be a vapor intrusion issue. Additionally, if the site geological conditions favored migration of the release (e.g., sandy soil), you may not only have on-site contamination, but it may have migrated off site onto adjoining properties. In other words, it’s a potentially-significant liability or an expensive “fix.”
Environmental Site Assessment Mistake 201: The “Clean Closure.”
Many (most) industrial sites have a long list of historical conditions that you expect to encounter. These are part of the overall risks that are factored into the transaction. Rarely do these sites have a “clean” Phase I/II ESA, nor does the client expect one. Moreover, the client is more likely interested in the level of potential contamination and what the level of effort (i.e. costs) might be if they had to remediate. Often, industrial properties come with numerous historical reports from previous spills and releases of chemicals.
Putting these data and associated risks into the proper perspective requires a discerning review of any historical data. For example, when the samples were collected, what were the regulatory cleanup standards and have they changed? Has collection methodology changed? Was the correct regulation applied (i.e., cleanup levels and obligations are different depending on the regulation)? Were the correct parameters tested (e.g., an older gasoline UST should include lead)? Are the data from the laboratory defensible, and do they include appropriate quality control?
It’s not uncommon for someone to have a Phase II ESA that is providing a false sense of security (it shows “clean”) because the data and/or regulations were dated or improperly applied.
Environmental Site Assessment Mistake 301: The Remediation Favor.
The fact that contaminated soil and groundwater are present is not news; after all, the US Environmental Protection Agency has a proposed budget north of $8 billion, and this more certainly includes sites with impacted soil and groundwater. With that said, the presence of contamination isn’t necessarily an immediate call to action.
In this scenario, contamination has been clearly identified at the site. The usual questions are, “How will it be remediated?” “What’s the projected cost?” Sometimes the first question should be, “Is it my contamination?” Followed by, “Does it need to be remediated?”
Here are two brief examples where the decision to rush to remediate was the wrong decision, or at least partially wrong.
In the first example, we had a project where when we were brought in, the client was remediating petroleum-contaminated groundwater from what was assumed to be a historical leak from a tank on their property. After all, they stored petroleum in their tank; the contamination in the groundwater was petroleum, so… BUT, don’t jump to the “obvious” conclusion.
After we were engaged, we set out to (re) build the conceptual site model and found in the historical records that a gasoline UST at the adjoining, off-site property was missed entirely. In the end, we were able to close out the project in short order, and we re-directed the regulator to the responsible party.
The second example was similar in that the contaminant, trichloroethylene (TCE), was used by our client and was found on the site. Complicating the situation was that TCE was also the focus of a regulatory effort in an adjoining residential neighborhood. This happened to be a divestiture, and our client was “under the gun” to come to some conclusion on remediation scope, liability, and costs. Their consultant at the time was suggesting approximately $8 million to remediate the TCE in groundwater (assuming no litigation from the off-site parties).
What we discovered in the peer review was (1) the TCE on the site could never (due to geological conditions) migrate to the “neighborhood property,” and (2) it was highly unlikely (due to geological conditions) that the TCE would migrate beyond our client’s property boundary. Fortunately, they avoided this $8 million remediation, they avoided a potential third-party lawsuit with the neighborhood, and this site was later “closed” at a considerably-less expense.
Assessment of potential environmental impacts on a site can appear to be simple and treated as such (the commoditized Phase I ESA); however, overlooked issues, or issues not put into proper perspective, can be very consequential for buyers and investors. To minimize the potential pitfalls, you should have a seasoned team of advisors who can help you navigate the many potential pitfalls.
If you have any questions or if you need assistance with a site assessment, please feel free to contact me (jbolin@dragun.com) at 248-932-0228, ext 125.