You’re about to purchase a piece of property or buy a business, and you’ve done your research. But have you remembered to do your environmental due diligence to uncover any environmental conditions attached to the property?
These conditions can be big or small, but you need to make sure that you know about them before completing the transaction. Doing so can help protect you from any liabilities associated with the conditions and allow you to address or minimize these issues from the outset.
“You can run into project delays if you find an environmental issue that you hadn’t planned for,” says Eugene P. Schmittgens Jr., of counsel with the litigation and environmental practice groups at Greensfelder, Hemker & Gale, PC. “If that happens, that’s going to result in a delay. You need to take time for this due diligence to find any problems and determine if a deal still makes sense or if you need to walk away from it.”
Smart Business spoke with Schmittgens about doing environmental due diligence in transactions and why environmental conditions may not mean the end of the road for your deal.
What environmental due diligence do you need to do before completing a transaction?
The first step in performing proper due diligence is a Phase I, which is a study of the property by an environmental professional. This helps identify conditions that may exist on the property that could lead to liabilities. No business or property is the same, but the requirements for performing a Phase I are specifically spelled out. While a proper Phase I contains the same elements, every approach to an environmental condition is different, based on what you’re trying to accomplish in the deal.
The Phase I is also very limited in scope and only addresses whether there’s been a potential release of a contaminant or petroleum product on the property. It won’t address if there’s asbestos, mold or lead paint in the building, which you also need to know about before a renovation project. The Phase I also won’t identify whether someone has a proper air or water permit or if the waste operation is handled properly. If you are purchasing an ongoing business that may require permits, you must request this additional review because it is outside the scope of a Phase I but still can impose liability on the purchaser.
If you do find an environmental condition, you may need to perform a Phase II investigation. This is invasive sampling of the property to figure out whether contamination exists. This is like throwing a dart at a dartboard you may or may not hit your target. So just because you didn’t find anything during sampling doesn’t mean there isn’t any contamination; you might have to do several iterations to find it.
What are some key things that need to happen when doing environmental due diligence?
You need to put your team together before entering a transaction to help guide you through the process. You need real estate and/or corporate attorneys, together with environmental lawyers. Then you need technical people, including a consultant who is familiar with the area and the state’s voluntary cleanup program to help you make good business decisions and understand the risk involved.
These people can help you understand what makes those liabilities exist under environmental law and how to avoid them. You can solve a lot of problems early on by using this team.
You also need to determine the future use of the property or business, because that will affect whether a recognized environmental condition will cause a major problem. For example, if you want to put in a development that includes a day care center, your requirements for remediating the property will be different than if a factory were going in.
What is CERCLA, and how does it affect businesses?
CERCLA is the Comprehensive Environmental Response Compensation and Liability Act, or Superfund, which was passed to address primarily abandoned contaminated properties. This made owners of contaminated property liable for the cleanup of these sites and provided for retroactive liability, so anyone with dealings on the site could be liable. This had a lot of people scared that they would buy property and not know it was contaminated, and then have to pay to clean it up.
A number of amendments have been made to the original law, and Congress has given up some Superfund liability if people purchase the property and address the contamination. This may involve remediating the property in a voluntary cleanup program. This allows the contamination to be addressed depending on the best use of the property.
How can you prepare for the liabilities and costs associated with environmental conditions?
To a large extent, people are afraid of properties that may have environmental conditions. But you need to break the issue down into the simplest terms what will it cost to address this, plug those costs into the pro forma and determine whether the deal makes sense. The problem with environmental matters is that we see big news stories about companies incurring millions of dollars to clean up a problem on property purchased.
You need to think of environmental problems as just another piece of the business transaction puzzle and have your team help you walk through this and understand the real risks. The risks can be significant, but some are not so big as to make you walk away from a deal.
Eugene Schmittgens Jr. is of counsel with the litigation and environmental practice groups at Greensfelder, Hemker & Gale, PC. Reach him at (314) 345-4776 or firstname.lastname@example.org.