What do wetlands, asbestos containing materials (ACM) and open regulatory violations all have in common? Answer: if ignored, these business environmental risks can turn an otherwise sound investment in commercial real estate into a bad one.
Anyone involved in the purchase and sale of commercial property is familiar with Phase I Environmental Site Assessments (Phase I ESAs). When it comes to Phase I ESAs, even sophisticated clients mostly want to know on thing: what are the recognized environmental conditions (a/k/a the “RECs”)? Yes, it’s important to know the RECs, particularly because they tell you if you potentially have a significant issue environmental issue on your property, one that might cost you money – immediately. The identification of RECs can also give rise to the consultant’s recommendation that subsurface sampling be performed, which can lead to additional out-of-pocket pre-closing due diligence expenses.
But what about business environmental risks (BERs)? What are they and are they significant? The attorneys at Periconi, LLC argue that they’re just as important as RECs and should not be considered lightly. In this first of a two-part blog post, we will explore BERs, generally, in the context of environmental due diligence; in the second blog post, we will review examples of the most common BERs that we come across.
Environmental Due Diligence 101
Parties to a real estate transaction should conduct environmental due diligence prior to closing; this is especially the case for purchasers of commercial and industrial property. But why?
Well, environmental due diligence in a real estate transaction – that is, investigating prior use and current conditions of a property – is one of the most important tools used to identify and assess the potential risks of environmental liability. State and federal environmental laws impose strict liability for cleaning up contaminated property, which extends to both current owners of a property, as well as past owners (at the time contamination occurred). “Strict liability” means that the government or a third party need not show intentionality, culpability or even knowledge of the environmental problem to require remediation by the current or past owner.
By performing environmental due diligence prior to closing, prospective purchasers, through the help of trusted environmental counsel and consultants, can properly determine the type and potential magnitude of environmental risk they face if the property is (or might be) contaminated. Are you dealing with potential minor or major contamination? Is there a chance contamination could be migrating off site? Are there soil vapor concerns? Et cetera, et cetera. Additionally, and as importantly, if environmental due diligence is performed correctly, prospective buyers of contaminated land may avail themselves of defenses or exemptions to liability prescribed by law. It all starts with the performance of a Phase I ESA prior to closing.
First, a little bit of background on Phase I ESAs…
You can boil Phase I ESAs down to four steps performed by a qualified “environmental professional” (EP), which does not include soil, groundwater or any other sampling:
1. Records review: the EP obtains and reviews documents, reports and other materials concerning the current and historical use of property and surrounding parcels. Anyone who’s dealt with Phase I ESA reports has seen the volumes of “database” reports generated for a property – the EP reviews all of these documents, as well as local municipal files, historical information such as aerial photographs, fire insurance Sanborn maps and telephone directories, to determine what the heck has been going on at this property and to identify any potential environmental issues. Some of these records date back to the late 19th Century.
2. Site visit: the EP will have to physically inspect the property, including the interior of any buildings, to see if there are any indications of potential environmental issues. Here, the EP will look for storage tanks and drums, pools of liquid, staining on the soil or paved surfaces, drains and sumps, pits and wells, among other things. If anything smells weird, the EP will note this too!
3. Interviews: the EP will, to the best of their ability, attempt to interview past and present owners, operators and occupants of the property in order to gauge as much information as possible about the property.
4. The Report: the EP will compile all of the information gathered in steps 1-3 and prepare a written report. This Phase I ESA Report documents the EP’s findings, opinions and conclusions. Sometimes, but not always, the Phase I ESA Report will provide recommendations for next steps on how to deal with any issues, such as recommending that additional investigation in the form of actual invasive work, namely, subsurface investigation (e.g., sampling of soil, soil vapor, groundwater, etc.) be performed.
So, what are RECs?
“Recognized environmental conditions” is a legally defined term, but put simply: it’s the presence, likely presence or future threat of an environmental issue at the property due to a release to the environment. EPs try their best to identify RECs because they are the “red flags” that most buyers and sellers of commercial and industrial property are looking for. RECs are the usual triggers for subsurface investigations and cleanups, which can be expensive depending on the type of investigation needed. Everyone hates RECs.
Talk to me about BERs!
Like RECs, “business environmental risk” is a legally defined term which many people think boils down to the notion of something “kind of bad” that does not rise to the level of a REC. Because of this simplistic view of BERs, some tend to downplay their importance. As long as there’s no REC, then everything’s okay, right?! Well, not quite.
Business environmental risk (BER) is defined as:
A risk which can have a material environmental or environmentally-driven impact on the business associated with the current or planned use of a parcel of commercial real estate, not necessarily limited to those environmental issues required to be investigated [by the Phase I ESA] (emphasis added).
Wait, what?
So, here’s the thing: Phase I ESAs are not required to look at or investigate every potential environmental issue with the property. The regulations and technical guidance documents focus primarily on releases or potential releases of contaminants. This means that there are some considerations beyond the scope of the Phase I ESA investigation that should be considered but due to the nature of what a constitutes a REC, does not need to be evaluated or even reported by the EP.
BERs are these risks that can impact the business associated with the current or planned use of the property beyond the typical conditions that Phase I ESAs are typically intended to consider. So, what the heck are we talking about?
Below is a non-exhaustive list of the some BERs that we have encountered and see with regularity:
A. Asbestos-Containing Materials (ACM):
B. Lead Based Paint:
C. Mold:
D. Wetlands:
E. Regulatory non-compliance:
F. Unconfirmed but suspected issues relating to “emerging contaminants“; and
G. Potential soil vapor intrusion condition.
In the next blog post, we will explore some of these BERs and convince you that they should not be ignored! But here’s a teaser: if the asbestos in the building you’re going to purchase is in good condition, with the current use continuing without renovations, you need do nothing right away; but if your planned future use requires you to renovate significantly or tear down the building, well, you’re going to have potentially significant additional expense properly handling the asbestos according to law while demolishing all or part of the building.
Contact the attorneys of Periconi, LLC at (212) 213-5500 if you are considering environmental due diligence prior to the purchase or sale of real estate and need recommendations for a consultant, need an attorney to review your environmental reports, or for more information regarding environmental due diligence process generally.
