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Can you sell a contaminated property?

Oct 22, 2024 9:00:00 AM / by David C Sulock posted in Property Transaction Screens, Phase I ESA, 1031 Exchange, Preliminary Assessment, Phase II Costs

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It is not illegal to sell a contaminated property, but it sure can be difficult.   The primary difficulty is contamination which devalues real estate and who is responsible for the cleanup. 

 

selling a commercial contaminated property

Determining a cost to clean up the property has to be part of the valuation of the property for purchase. Let's say for argument's sake you have a $1,000,000 property, with $200,000 in anticipated cleanup costs.   I will not bother dealing with what you pay for this property, but it is common that not only the $200,000 is deducted from the sale price but an additional amount is deducted for the headache and management of this future cleanup if cleanup is transferred to the new owner.   In this scenario, buyers take the risk that the $200,000 is fixed, which is not always the case as costs rise and regulations charge (becoming more stringent)., which also increases cost.

That is a very simple scenario of selling or buying a contaminated property. Unfortunately, environmental regulations add another layer of complexity.   If you own a contaminated property, you are the Responsible Party (RP) and Person Responsible for Conducting Remediation (PRCR). 

Clearly, you should discuss this type of sale with your attorney, with the major consideration being Who is Responsible for the cleanup and how is that responsibility maintained?  For this example, we will assume that the buyer will be taking the role of PRCR as defined below.

A Responsible Party is a party that has an affirmative obligation to remediate, as defined by the Brownfield and Contaminated Sites Act, N.J.S.A. 58:10B-1.3, as stated below:

“An owner or operator of an industrial establishment subject to the provisions of P.L.1983, c.330 (C.13:1K-6 et al.), the discharger of a hazardous substance or a person in any way responsible for a hazardous substance pursuant to the provisions of subsection c. of section 8 of P.L.1976, c.141 (C.58:10-23.11g), or the owner or operator of an underground storage tank regulated pursuant to the provisions of P.L.1986, c.102 (C.58:10A-21 et seq.), that has discharged a hazardous substance, shall remediate the discharge of a hazardous substance.”

A Person Responsible for Conducting the Remediation includes all parties who are conducting remediation, regardless of their status as a Responsible Party. A Person Responsible for Conducting the Remediation is defined by SRRA, N.J.S.A. 58:10C-2, as stated below:

"Person responsible for conducting the remediation" means (1) any person who executes or is otherwise subject to an oversight document to remediate a contaminated site, (2) the owner or operator of an industrial establishment subject toP.L.1983, c.330 (C.13:1K-6 et al.), for the remediation of a discharge, (3) the owner or operator of an underground storage tank subject to P.L.1986, c.102 (C.58:10A-21et seq.), for the remediation of a discharge, (4) any other person who discharges a hazardous substance or is in any way responsible for a hazardous substance, pursuant to section 8 of P.L.1976, c.141 (C.58:10-23.11g), that was discharged at a contaminated site, or (5) any other person who is remediating a site.”

The seller is and always will be the Responsible Party for the site and until real estate is transferred they are also the PRCR.  The new buyer can assume the mantle of PRCR and continue the remediation of the site.  If the buyer assumes the PRCR and then fails to meet their obligations and the DEP gets no response from them, the seller (former owner) will be contacted by the DEP as the original RP to continue with the remediation. 

In English, the seller holds responsibility for life. If the buyer fails to clean up the site, the seller will be on the hook.   Attorneys can protect a seller with language in the agreement of sale transferring RP/PRCR roles.

There is a form that is submitted to DEP adding the new property owner as the PRCR if that is the agreement.   The legal wording must have a foundation of what the new buyers and sellers’ responsibilities will be regarding the future environmental work at the site.

An alternative to transferring the responsibility of the cleanup is for the seller to maintain responsibility and positive control of the cleanup after the sale.  Defining cleanup is also very important.  For example, many contaminated sites never get 100% cleaned up by removing or remediating the contamination, rather the contamination is permitted in place. Clean is not clean, but rather legal contamination. If your agreement of sale sells you will promise a clean site, define clean.

It sounds complex and confusing.   There can be many variables involved, call a professional.

 

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Do not misuse the term Phase I  ESA

Dec 20, 2023 10:43:00 AM / by David C Sulock posted in Phase I, Property Transaction Screens, AAI All Appropriate Inquiries, Phase II, Phase I ESA, ASTM E1527-21

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Do not misuse the term Phase I

A Phase I ESA (Environmental Site Assessment) is historical research on a property, typically commercial that looks for potential environmental impairment to the property.   No testing or remediation is performed in a Phase I.  A Phase II is all about testing and a Phase III is Remediation. 

The map below is of a long-since-developed site, that in the map was a train turnaround.  Trains are notorious for oil leaks and spills, surely a train turnaround such as this would hold legacy contamination that an unsuspecting property owner could be inheriting if they did not complete a Phase I.

What is a Phase I Environmental

Regarding testing, no Phase I is required to test, A Phase I identifies areas that could require testing.  Case in point, the photo below shows a storage tank on its side.   There is a concern because anything stored in the tank could have leaked out because the tank is on its side.  There would be a recommendation in a Phase I to test the soil around the tank.   But no testing is completed during the Phase I, that is left for Phase II.

Dumping fund Phase  I ESA

You can't skip a Phase I and go to a Phase II as the Phase I is your road map of what to inspect. 

The most common misuse of the term Phase I is from residential home inspections.

We are commonly called to do an inspection of a property after a Home Inspection is performed.   It is not uncommon that the home inspector notices evidence of mold, or some other environmental hazard such as a former oil heat, and recommends further evaluation, which is prudent and warranted for sure.   But when a Phase I is recommended, it shows a clear misunderstanding of what a Phase I ESA actually is.

Here is an exert from such a report

"Underground Fuel Tanks Noted:
The evidence noted is the presence of either a fuel tank fill pipe or a fuel tank breather pipe at the referenced location. There is evidence of an underground fuel tank installed on the property. Further investigation is required to determine the condition of the tank as well as the presence of any leakage into the soil. A Phase 1 environmental audit of the subject property is recommended to determine the presence and/or condition of the underground oil tank and to see if other environmental hazards are present. The soil should be evaluated, and the tank should be pressure tested. Permanent removal of the underground storage tank should be considered. They do not leave fill pipes behind if the tank was removed. There is no evidence an oil tank was located in the basement.

A Phase I ESA follows ASTM protocol for historical research of a property, 99% of the time it’s performed on commercial not residential, unless multi-family.

A Phase I is meant to identify the potential for contamination of a site by hazardous or toxic materials and to identify other possible environmental constraints on the site. It is not meant to be a detailed, comprehensive investigation based on quantitative or qualitative analytical data. No environmental sampling and analysis will be performed under the Phase I scope of work. The form and content of this ESA I will follow the form and content as outlined in ASTM standard E 1527-21. The results of the Phase I ESA will be used to determine whether or not further study (such as a Phase II ESA) is warranted, based on the background information gathered and the results of the site inspection.

https://www.currenenvironmental.com/blog/why-a-phase-i-is-important

 

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Environmental Due Diligence in Commercial Real Estate Transactions

Mar 8, 2023 10:09:20 AM / by David C Sulock posted in Phase I, Property Transaction Screens, AAI All Appropriate Inquiries, Phase II, Phase I ESA, Phase II GPR, 1031 Exchange, ASTM E1527-21

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There are inherent risks in life and in particular when you purchase something.   Warranties on products including cars are meant to balance the risk.  But when you buy a commercial property, you are buying more than the land and any improvements, you are buying any environmental issues past or present unless specified otherwise.  (There are sites that have government permitted contamination, that is a restriction on the property for sure. but it is s defined environmental liability). 

 

Environmental Due Diligence in Commercial Real Estate

 

I am referring to the purchase of a property that has undiscovered environmental issues.  How you avoid buying a contaminated property is by performing Due Diligence such as a Phase I Environmental Site Assessment.  More about Phase I ESA Click Here.

 

As this article states when should you be concerned about environmental issues on a commercial property?

The safe answer is on every commercial property that you have not completed your own due diligence.

Yes, that downtown property you want to buy may have been an auto garage, dry cleaner, part of a rail spur, I've seen tanneries (Tanneries are where animal hides are tanned, and the wastes generated from tanneries are considered a pollutant to the environment and has potential to pollute both soil and water because of the use toxic chemical constituents in the tanning process)

environmental issues with commercial properties

The rub of downtown areas is they were the center of commerce, which can cause pollution long before environmental regulations became the norm.   Buying close to a rail line?  Well rail roads caused contamination and land was often built up with historic fill.  (Historic Fill material was commonly used to raise the topographic elevation of properties.    The fill material is composed of non-indigenous material… which may have been contaminated prior to emplacement and is in no way connected with the operations at the location of emplacement and which includes, without limitation, construction debris, dredge spoils, incinerator residue, demolition debris, fly ash, or non-hazardous solid waste). Because of the nature of its composition, historic fill material is a widespread concern for many property owners and potential property purchasers.    In short, the property can have at the time of placement legal contamination, which today is no longer legal.

Yes, none of this is fair.  There are other warning signs when you buy a commercial property even when you perform due diligence, I will run down a couple of items buyers should be concerned about.

 

1.  A Phase I includes interview and questionnaire with the owner who is typically the most knowledgeable party.    When this can't be accomplished you have important data gaps, which may be intentional on part of the seller.

 

2.   The owner has no prior environmental reports, meaning they didn't do their own Phase I or will not supply their report.  Want to know why an owner may not want to be interviewed for a Phase I, their lack of due diligence can be a driver.  

 

The historical map below shows auto sales at a downtown property, and it also lists 550 gallon gasoline tank in the street.  That tank and contamination belongs to the property and will only be known if you do due diligence. 

Commercial property environmental study

3.  The Phase I leads to a Phase II, which is testing and can absolutely open up a can of proverbial worms.  If you test you have a chance of finding a problem.  No testing?  Well 100% chance of finding nothing.  But the rub is when the owner denies or limits testing.  For example, we had a site where both soil and groundwater testing were warranted.  The owner did not want groundwater tested because the property had municipal water.  Groundwater is typically the 1st water bearing zone on a property, a good average is 16' to 20' deep.  You are not drinking this water ever, but if this water is contaminated, well it belongs to the owner.   My point being sellers will come up with some nugget of reason why we do not need to test, which is irrelevant in the context of environmental due diligence.

 

Phase I Due Diligence

 

4.   Owner provides reason why due diligence is irrelevant (remember buyer pays for the work not the seller).  Case in point client buying a former appliance store, which was a former laundromat.   Seller wanted no testing because refrigerators and microwaves are not an issue and a laundromat, well that's just dirty cloths.  Fast forward we test groundwater water and find dry cleaning solvents.  Conclusion, the laundromat did dry cleaning.  Saved our client $165,000.

 

Commercial Property Purchase Pro Tips

Start your due diligence and do not consider Due Diligence to be a hand stamp, because if you find an issue it will take time address it.

Understand that your proposed settlement date was likely set PRIOR to performing Due Diligence.  When Due Diligence finds an issue settlement could be pushed back weeks, months even years. 

 

 

 

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Why perform a Phase I Environmental Site Assessment

May 4, 2011 10:42:00 AM / by david sulock posted in Phase I, Environmental Site Assessment, ASTM 1527-05, Property Transaction Screens

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Who requires a Phase I ESA?

Traditionally, a Phase I was contracted by the bank or lending institution on properties where financing was being arranged.  The Phase I was primarily  performed for the protection of the banks, who were concerned that if they loaned money for a contaminated property they may be held liable for the site cleanup.  Today, many banks with loans under a million dollars and borrowers supplying a down payment do not require a Phase I.  This has been an industry shift over the past several years as banks have come to understand where their limit of liability stands.

Cost for a Phase I ESA

Phase I Environmental

 

 

What is included in a Phase I?

The Phase I is a property assessment that includes a walkover of the property and associated structures; a review of historic property information including maps, aerial photographs, deeds, telephone or address directories, etc.; a review of contaminated properties in the vicinity of the subject property; a summary of knowledgeable party information and review of prior reports; and the review of local, State and Federal files pertaining to the property address.

Items evaluated in the Phase I report include: tanks, drains, pits, spills, in-ground and aboveground equipment, petroleum and chemical use, and environmental liens.

Additional issues which may be included in the Phase I at the lenders or clients request include: wetlands, radon, asbestos, lead-based paint, and drinking water. 

The Phase I report is typically research only.  Unless otherwise specified as part of the scope of work, testing or surveys are outside of the typical Phase I requirements.

Why complete a Phase I if my bank does not require one?

Although many banks are not requiring a Phase I on some commercial loans, the environmental regulations leave the burden of environmental responsibility on the property owner.  Performing a Phase I, allows a purchaser to complete the necessary due diligence.  It is this due diligence that enables a purchaser to obtain prior to taking possession of a property.  Buyer beware is relevant now more than ever in commercial real estate transactions.  If a property is purchased without a due diligence evaluation and subsequent environmental issues are found in association with the property, the property owner is now burdened with the cost of remediating the issue. The performance of a pre-purchase Phase I could alleviate the potential for finding environmental issues in the future and thereby holding up future transactions.  As a potential purchaser, the determination of environmental issues on a property could be used as leverage for the seller to remediate the concern prior to purchase or could be used to negotiate the property value pending the need for the potential purchaser to perform the cleanup.

If I don’t do a Phase I and buy a property how would I ever find out if there was an environmental problem with the site?

The most common way is when you go to sell and the potential buyer completes a Phase I and discovers an environmental Area of Concern (AOC).   Today the largest purchaser of Phase I’s is not the banks, but commercial real estate investors and owners (*transactions under $1,000,000.00).

I own a property, never had a Phase I and I am now thinking of selling the property.  Do property owners have Phase I’s performed?

One of the largest shifts in the commercial real estate market today is that many land owners are having a Phase I performed to root out environmental issues before they become an issue when a buyer is found.   A buyer performed Phase I is viewed as both a marketing tool and an environmental property assessment that can help sellers anticipate issues with a property.  It can be akin to a homeowner having a home inspection completed to address issues that a purchaser might find during their inspection. 

If an environmental issue is found in a Phase I report on a property I am buying, can I still purchase the property?

 If the issue is fully disclosed to the lender (if one is involved) and the buyer is wiling to accept the liability and cost of addressing the issue, then yes you can buy the property.  But the real question is should I address the issue before buying the property?

The investigation of potential issues found in the Phase I is typically addressed as part of a Phase II Environmental Site Assessment.

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