Caveat Emptor

Since the enactment of environmental legislation of the 1980s, the word “contamination” has directly been associated with liability and risk. The sale or transfer of commercial and industrial properties with contamination has historically frustrated businesses. In fact, most potential buyers have abandoned the deal as soon as the word “contamination” is mentioned.

Owners, purchasers and lenders all have been affected financially — there are numerous cases in which potentially responsible parties have been subject to large monetary damages because of having certain associations with contaminated land.

To protect oneself from these liabilities, a thorough understanding of the regulations and a properly conducted environmental Phase I site assessment is crucial. Various New England states have had environmental legislation in place for many years now. The original purpose of these regulations and standards were designed to protect the public health, safety, welfare and the environment. Although these serve an obvious purpose, some have created a surplus of contaminated land. In addition, many feel that these regulations have hindered the development of sites.

Therefore, these lands are left vacant due to their liabilities. This was true in the 1980s, and remains so to some extent today.

Examples are many. We have investigated hundreds of sites throughout the Northeast and found many examples of abandoned property or situations where contamination has caused deals to fall apart. Typical Phase I environmental site assessment (ESA) standards are about as varied as the sites to which they are applied.

The U.S. Environmental Protection Agency is currently reviewing current American Society for Testing and Materials (ASTM) standards, which are supposed to provide a method to follow when investigating a site. The EPA says changes will raise the level of how investigations are conducted.

No substitute

Poor planning and failure to understand how to deal with contaminated property can lead to the breakdown of a real estate sale.

For example, our firm was involved in the Phase I site assessment of a large industrial site built at the turn of the century. Using the ASTM standard approach, asbestos-containing materials and underground storage tanks were discovered. The results indicated that other potential subsurface contamination existed.

A Phase II subsurface investigation was developed and implemented. The results of the Phase II investigation revealed that high concentrations of lead, gasoline and other hazardous compounds were present in the soil and groundwater. Further investigation and remediation was proposed. Cleanup cost was estimated at $200,000.

Although the property was valued at about $3 million, the owner was dismayed to learn that it had such liabilities. The buyer was still interested in the property and wanted to negotiate a new selling price because of pending cleanup cost, but the deal fell apart because the parties failed to compromise. The owner was left with a contaminated site and the prospective buyer lost thousands of dollars invested for due diligence to protect his interests.

To prevent such a scenario from occurring, it’s necessary to develop financially feasible goals for the remediation of the property.

For instance, a gasoline station undergoing a similar investigation, started out with a typical Phase I ESA, which identified the probability of contamination prompting a Phase II site investigation. Monitor wells were installed, and soil and groundwater contamination was identified.

The New Hampshire site was eligible for coverage under the state’s groundwater cleanup fund, providing help with investigation and cleanup.

After a $5,000 deductible was paid by the current owner, the property was sold and fund coverage was transferred to the new owner. The deal worked because we were able to bring both parties together and discuss the alternative strategies for dealing with contamination.

In this instance, both parties were willing to work with each other and successfully negotiate the deal. Obviously, the fund was a determining factor, but the point is that interested parties should examine the alternatives for financing contaminated properties. There are several similar cleanup funds in New Hampshire and other states.

Among the alternatives are Activity and Use Restriction (AUR), a risk-based approach used in New Hampshire through which contamination is cleaned up to an acceptable level depending on the site’s intended future use. Certain restrictions for future use are put in the deed and prevent certain development as long as the AUR is in place. This allows the owner to proceed to at least use the land in some fashion.

Even with alternative solutions, there is no substitute for a thorough environmental site assessment by a competent environmental professional.

A cheap environmental site assessment, likely completed by entry-level staff, may not be the deal you think it is. The complex issues of contamination must be considered and evaluated carefully, because the regulatory mechanisms for developing contaminated properties are in place.

Nevertheless, real estate investors, developers, bankers, owners and prospective buyers should no longer think that contamination is the end of the deal, although “caveat emptor” still applies.

James M. Tarr is director of environmental services at Applied Geosystems, Greenland.