Tuesday, December 20, 2016

Five Things Every Realtor Needs To Know When Representing Contaminated - Potentially-Contaminated Properties

Representing a property with known or potential environmental issues creates special challenges for the commercial real estate professional. This could include properties with old tanks and old spills or leaks - even those that may long ago been have been cleaned up and closed by State agencies.

Although more challenging, such properties can be sold in a reasonable time frame, while minimizing the liabilities of both the Seller and the Buyer. Five key points the real estate professional must keep in mind are :

1 - The Seller "Owns" The Liabilities.

Until the transfer of ownership, the Seller (the current property Owner) owns the environmental liabilities on the property. A prospective Buyer is motivated to identify these liabilities to determine if they could impact the value of the property or restrict their use of the property. In the absence of definitive information, Buyers will tend to over estimate the impact of these potential or actual liabilities, on the value of the property.

2 - Sellers Cannot Control Future Use Or Activities On the Property & Cannot Control A Buyer's Future Risks.

When spills or leaking tanks are discovered on a property, the agency (typically the State) will oversee cleanup, either through enforcement actions or through a voluntary cleanup program. Once the agency determines that any remaining contamination at a site is no longer a significant risk , the agency will "close" the site or issue a "no further action", and allow any remaining contamination to be left in-place. The important point to remember is that this closure is an "as-is, where-is" approval. As long as property use remains the same, and any remaining contamination is left undisturbed, then this closure could be transferred to any future property owners. If a future owner chooses to change the property use, redevelop the property, etc., then the agency may need to be notified and further cleanup may be needed. A seller has no control over future actions on the property which could potentially reopen closed contamination issues.

3 - Plan Ahead For Buyer and Their Lender To Obtain Liability Protections.

If Buyers or their Lender require liability relief letters, such as a no further action or no association letter, you will need to factor in the time required for these issues to be addressed. It is important to remember that agencies will issue these letter only if contamination is actually documented on the property, not simply based on the possibility that contamination could be present. Therefore, in some cases a site investigation needs to be conducted. As an example, a typical scenario might be:2 weeks - Phase 1 Environmental Site Assessment
3-5 weeks - Phase 2 Investigation
1 week - Prepare and submit request to agency
4 weeks - Agency review and issuance of letter Therefore it is not unusual for it to take 10-12 weeks to go through the process.

4 - Buyers and Sellers Must Work Together

For a successful transaction, the Buyer and the Seller must work together. This may mean the Seller granting access to the property for a Phase 1 environmental site assessment and a Phase 2 investigation, if required. The Seller will also need to be involved if contamination is discovered so that proper agency notify occurs. This notification opens up a pathway for the Buyer and their Lender to get liability protection letters from the agency. Likewise, the Buyer will need to communicate all results to the Owner (if the Buyer directed a Phase 2 investigation) to ensure the Seller has the information they need to notify agencies. The Buyer will also want to let the Seller know if they intend to request liability protections from the agency - it is possible that the Seller can also request similar types of liability protections for themselves.

5 - Unfortunately New Issues Can Be Discovered.

One of the most challenging situations is when new contamination issues are uncovered, especially coming from neighboring properties. Leaking tanks and other sources of contamination are newly discovered each year, which can create additional issues which may need to be resolved between the Seller, Buyer, Lenders and the State agency. In addition, over time cleanup standards can change and new information on risks from contamination can "reopen" some closed issues. One example is the current interest in "soil vapor encroachment"; many leaking tank sites that were closed prior to 2010 were not evaluated to determine if contaminants are migrating though soils and into nearby buildings. Although these sites may be closed, they can be reopened to address soil vapors. Therefore, evaluations of soil vapor intrusion have become increasingly common, especially since 2013.

By understanding the process, the real estate professional can play an important role in transforming these formerly contaminated properties into usable and marketable properties, increasing their value and the value of nearby properties.

For more information go to:
Phase 1 Environmental Site Assessment Buyer's Guide
Regulatory Briefing - Landowner Liability Protections and All Appropriate Inquiry

No comments: