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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   October 2010

Get a Cleaner Closing

Take steps to avoid having environmental issues derail your deal

One of the biggest risks in a commercial real estate transaction is environmental remediation. Commercial mortgage brokers must be aware of the due diligence environmental issues require and educate their clients not only about what to watch out for when buying a property, but also what to do once they own a property. After all, buyers may eventually be sellers, and sellers who are prepared to meet due-diligence demands often can have a quick and clean closing.

Sellers don’t necessarily need to have a Phase I environmental site assessment performed before the lender’s or buyer’s due diligence, but they should address any housekeeping issues on the property and have ready any previously prepared environmental reports. This can help expedite the environmental due-diligence process.

There will always be risk to some degree — and it is in sellers’ and buyers’ best interests to do their part to minimize risk. Brokers can help their clients by advising them to take the following steps.

Establish a baseline

Sellers should be ready to provide lenders with a pre-due-diligence packet that shows what steps they have taken to minimize risk before the loan-application process.

That packet should include environmental due diligence to establish a baseline that ensures that the borrower doesn’t end up responsible for contamination from a previous owner. There are horror stories about owners going to sell their property only to discover it has contamination from a previous owner that they weren’t aware of going into the deal. The contamination is discovered when they try to sell the property, and the property’s value is diminished severely.

Sellers can have a desktop study performed when they list their property. This can provide confidence and a level of comfort to potential buyers and their brokers. This is a quick and inexpensive way to see if the subject property and the surrounding properties have issues that could impact the transaction.

These desktop studies can range from $350 to $500. They typically involve research in various government databases, as well as a search of historical use records pertaining to the subject property.

These studies usually take less than five days and can help buyers decide between multiple properties.

Be forthcoming

Often, an environmental firm will begin work on a site assessment only to discover that there was an issue with the subject property. When informed of the issue, the seller often produces a previous report that provides environmental professionals the information they need to move forward. By not producing this information going into the transaction, however, the process is delayed.

Unfortunately, many sellers are aware of issues that they either caused or inherited from previous owners but are slow to come forth with all the information they have in hopes that they can pass liability to the next owner without it being discovered. If there are issues, however, they will be uncovered by the environmental professional.

Sellers must be made aware that withholding this information will only delay the deal and could cost them in the long run. Buyers may be wary to pursue a property once hidden issues surface. By voluntarily providing all information from the onset, sellers can help ensure that the transaction stays on track.

Address cleanup issues

If sellers find themselves with contamination on their property, they should pursue remediation right away. Depending on the nature of the contamination, there are numerous options for them to pursue.

The best option is to remediate the problem and get a “no further action” letter from a governmental entity stating that no further remediation or monitoring of contamination is required.

Signing an indemnification agreement is another option, if the seller has enough financial resources to cover the costs of completing remediation for the transaction to continue.

There are many other options, including setting up an escrow account with a minimum of 150 percent of the total estimated cost of required remediation; existence of adequate environmental insurance or bonds; engineering and institutional controls; and other strategies depending on the lender’s operating procedures and the nature of  the contamination.

Defining contamination

To assist with educating sellers and borrowers, turn to the U.S. Small Business Administration’s (SBA’s) guidelines. These provide a basic list of sources of contamination that you can share with your clients. It’s a good starting point.

In Appendix 2 of the definitions section of SBA’s standard operating procedure 50 10 5(B) are sources of contamination that include: “(1) damaged or discarded automotive or industrial batteries; (2) pesticides, paints or other chemicals stored in individual containers greater than 5 gallons in volume or 50 gallons in the aggregate; (3) chemicals in industrial drums  or sacks.”

Go to sba.gov for the complete list and for more information that can help you and your clients.

With a little effort by the seller, many of these issues can be handled inexpensively before the environmental investigation. For instance, pesticides, paints or other chemicals often can be addressed by simply installing some form of secondary containment. Chemicals in industrial drums or sacks can be properly disposed of before the environmental investigation.

If sellers are made aware of these possible issues from the beginning, they can have the necessary data readily available for the environmental professional before a report with potential issues that need further action is written.

Also, when borrowers are educated from the onset about what they can do to keep their new property clean, they likely will be free from any environmental issues when they sell the property. By educating buyers and sellers, brokers provide additional value and instill confidence in their services.  


 


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