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Environmental Issues – A Hidden Gold Mine?

19 Apr 2017

Investing in a commercial property that has significant environmental issues might seem overwhelming. After all, the work necessary to resolve such violations may come with significant effort and expense– requiring an extensive and expensive investigation, cleanup, and detailed and lengthy oversight by state or federal regulators. Nevertheless, our experience has proven that these properties can be incredible opportunities as long as buyers properly assess and “price” the potential risks through purchase price discounts. To help guide you, here are some critical considerations when buying a property with environmental issues.

Conduct due diligence

As the new owner of a property with environmental issues, you may be held liable under a variety of state and federal laws for cleaning up the previous owner’s contamination. Therefore, before you buy, it is essential to conduct due diligence about the nature of the environmental violation, liability, and remediation required.

Fortunately you can begin the due diligence easily and cost effectively by accessing much of the information you will need online. For example, you can quickly discover whether a property is located within an EPA Superfund site or has other EPA issues by visiting the EPA’s website. If it is a state overseen issue, you can check through a simple search on Geotracker.com. Also, it’s essential to research whether the current owner of the property is a potentially responsible or liable party for a violation that may be more of a regional issue as opposed to limited to the Site. If so, the owner may have been issued a “PRP” or “PLP” letter by the state or EPA, which may be passed to you as the new landowner.

Understand contamination risks

The risk of a contaminated property is directly tied to the nature and extent, known or unknown, of potential contaminants, so it’s important to familiarize yourself with what to look for. The most common problems arise when products such as cleaning solvents, fuels (such as gasoline or diesel) and oil or metals, contaminate soil or groundwater. Cleaning solvents can be found at large industrial and manufacturing facilities but also at local dry cleaners.  We all come in contact with fuel in our daily lives but forget that if a facility has a fleet of vehicles, backup generators, boilers and heaters, they may have a large quantity of fuel being stored.  While there are exotic and unique contaminants at some sites, most of the contaminants you will encounter are rather common. Consultants will be necessary to help analyze and quantify the risk but your common sense and awareness will be an invaluable tool.

When contaminants are spilled or released at a Site, how they migrate, where they migrate to and what media (soil, soil gas and groundwater) they impact varies by type of contaminant as well as site specific factors. Liquid contaminants such as solvents and fuels can penetrate pavement (especially older, cracked pavement) and quickly migrate considerable distances.  Materials that are transported underground through piping or stored underground in tanks have a head start!  Understanding how far a release has spread and what media are affected are critical in understanding your risk as an owner of a contaminated Site.  When groundwater has been impacted by a release, the stakes are significantly higher due in part to the fact that groundwater is more expensive to investigate and remediate but also due to the fact that impacts in groundwater can travel off site and raise interactions with third party sites. But, given these caveats, once you understand the nature of the contamination, you can develop a range of alternatives and costs so as to decide whether the deal can afford the required remedy.

Potential Issues to avoid

As a general rule, we do not pursue properties with severe groundwater contamination unless they have been very well characterized and the current owner is in advanced discussions with the regulatory agencies regarding a scope of cleanup. Metal plating is another leading contributor of environmental waste and contamination that we recommend avoiding. Heavy metals used in plating are extremely difficult to cleanup when contamination occurs and are linked to severe health hazards. Remediation typically includes expensive excavation and off site disposal, expensive in situ (Latin for “in place”) treatment or leaving the material capped in place with restrictions on future use of the Site.  Also be wary that Southern California is a hotbed for EPA Superfund sites, including large portions of the San Gabriel and San Fernando Valleys and South Bay. If the property is located in a Superfund site with outstanding issues that have not been resolved by the Environmental Protection Agency (EPA), then it’s probably best to walk away or plan to wait a long, long time for any hope of resolution.

Understand your needs

Environmental contamination at a Site raises unique challenges and liabilities that can exceed the value of the real estate but also can pose fantastic opportunities if you are aware of how to quantify and manage the risk. Contaminated properties have unique needs when it comes to marketing and disclosure, financing and management. Sometimes the challenge is the timeframe it takes to resolve a problem while other times a proposed development may open a range of alternatives that are otherwise not cost effective.  Understanding the risk and plans for the Site are critical. There is a robust marketplace of tools and products to help understand and manage the environmental risk from contaminated properties including hold back arrangements, escrow funds, indemnities and environmental insurance. But, it starts with a thorough understanding of the Site, the nature and extent of the contamination and the plans for the Site in the future.

 

This blog is produced as a resource for real estate investors by the senior management of Hager Pacific, which includes David J. HagerAdam MilsteinRobert Neal, and Jason Schirn

About the Author: Robert Neal and Mark Cousineau
Robert Neal is a managing partner with Hager Pacific Properties overseeing the firm’s acquisitions, renovations and dispositions. Over the course of his real estate career, Rob has been responsible for the acquisition and disposition of industrial and commercial properties valued at $2 billion. Mark Cousineau, NREP, is a Principal with Hazard Management Consulting Inc. of San Clemente, California. HPP’s preferred environmental consultant, Mark has a diverse professional background in environmental management which includes working as a generator, regulator, consultant, and corporate advisor in hazardous waste and other environmental issues.