Closing on Environmentally Impacted Real Estate
By Chris Fonzi
Ask me about the worst-case scenario. Everyone with a contaminated piece of real estate does. How much can it cost? How long can it take? If you’ve had a deal torpedoed by an environmental contamination issue, the worst-case scenario was the veiled threat, the elephant in the middle of the closing table.
In fact, contamination issues have generally become increasingly manageable during the past 20 years. Lenders have become less skittish. Government environmental agencies have become more sensitive to business. Outcomes have become more predictable. But if you ask an environmental consultant for the worst case scenario, it will still be scary as hell. If you want to get a deal closed, here are some tools you should be familiar with.
No further action letters: Widely (and incorrectly) regarded as a silver bullet against environmental contamination issues, few things are more reassuring to buyers and lenders than a letter from the government saying that nothing further is required in response to the problem. Don’t get me wrong, having a no-further-action-required (NFA) letter is way better than not having one, but the fine print is important.
First NFA letters don’t say that a property is clean. In fact, the owner of a clean property wouldn’t need one. They say that a release (spill, leak, whatever) has occurred, but the government no longer regards it as worthy of attention. The NFA is the end of a process. Gas stations may report a half dozen fuel releases over 20 years, each requiring a separate NFA letter.
Also, an NFA letter is only as good as its factual underpinnings. If the state of Georgia issues an NFA based upon groundwater analysis that shows a certain level of contamination, a change in that level (or a half dozen other site specific factors) means the state can rescind the NFA and put the responsible party back on the hook for cleanup costs. Some of the factors that can change the NFA status of a property are as simple as removing a fence from the property, or a homeowner installing a drinking well a half mile away.
Petroleum trust fund: Georgia’s Underground Storage Tank (GUST) fund has been a go-to solution for closing with contamination from underground fuel tanks. Owners of gas stations and other regulated tanks pay an “environmental assurance fee,” which is like a surcharge on fuel, and is used to reimburse them for the costs of investigating and cleaning up fuel releases, subject to a $10,000 deductible and a $1 million cap. The two primary requirements for securing trust fund reimbursement are that the owner can establish the fees have been paid and they are in compliance with other operating requirements for tanks, like registration and leak detection.
Typically, GUST fund coverage means the seller indemnifies the buyer and agrees to clean up the contamination after closing. The use of GUST money makes the time and cost associated with the cleanup largely irrelevant, and gives the buyer and lender some assurance that the cleanup will not be abandoned before it is completed. As an additional incentive to the seller, some amount is often kept in escrow until an NFA letter is issued at the end of the cleanup.
Timing can be an issue with the GUST fund if the contamination is identified during the transaction. Before the state will commit to GUST coverage for a release, the owner will need to submit a Corrective Action Plan (a testing report that goes beyond a Phase II) and wait for the state to evaluate the compliance status. This can mean a 3-4 month wait before you have confidence that GUST coverage will be available.
Unlike many other states, Georgia’s GUST fund has remained relatively stable through the recession, although cleanups have sometimes been delayed pending the availability of funds.
Brownfields Protection: Georgia’s voluntary Brownfields program is designed to keep contaminated properties in active commercial use. Brownfields are real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant. In essence, the buyer agrees to deal with any soil contamination at the site, and the state agrees to give them a free pass with respect to groundwater contamination. Since the cost of groundwater cleanups is notoriously difficult to quantify, this can be a huge incentive for the buyer. At the end of the cleanup, the state issues the buyer a Limitation of Liability letter, which is like a limited indemnification against further liability and is considerably stronger than an ordinary NFA.
Brownfields protection is only available to bona fide, arms-length buyers. Because most of a Brownfields cleanup happens after closing, though, predicting and allocating the costs of cleanup ahead of time still needs to overcome the specter of the worst-case scenario. For this reason, the program has seen the most use in situations where only groundwater is contaminated, like when the contamination originates from an adjoining property.
In some cases, these tools can be used in concert, or with other measures (like indemnifications, insurance and escrow funds) designed to either resolve a contamination issue or make it financially irrelevant to the deal. In most cases, though, the key is having enough time to put the pieces in place. Start addressing a contamination issue early in the process and you will put yourself way ahead of the worst-case scenario.
Chris Fonzi is Principal of Logic Environmental, Inc., an affiliate member of the GABB, specializing in environmental assessment of real estate. He is an attorney and has been performing environmental consulting in Georgia for more than 20 years.