Category: Real Estate Due Diligence

A PANEL OF EXPERTS ANSWER DRYCLEANERS’ QUESTIONS ABOUT BUYING OR SELLING A POTENTIALLY CONTAMINATED PROPERTY AND THE COMPLEX ENVIRONMENTAL AND LEGAL ASPECTS THAT SHOULD BE CONSIDERED

The purchase or sale of a drycleaner property and business is a delicate dance between the parties involved because of the potential discovery of PCE contamination and other environmental liabilities during the due diligence process. Luckily, there are options available to both buyer and seller to keep a deal from falling through. First, you need to enlist a trusted environmental professional to assess areas of concern properly.  Second, you need to hire an experienced environmental attorney to shepherd the negotiation through the proper legal mechanisms,  environmental liability, purchase of the business or the property itself, as well as utilizing insurance assets to bargain for a fair deal.

At a National Clothesline webinar, EnviroForensics, PolicyFind, and Scarinci Hollenbeck discussed how to buy or sell a drycleaner. At the end, attendees submitted their questions for the panel to answer.

Watch the recording of the webinar, “Why Phase I ESAs are Important for Buying or Selling a Drycleaner.”

This Q&A session has been lightly edited for clarity.

WHAT HAPPENS IF CONTAMINATION IS FOUND DURING DUE DILIGENCE? DOES THAT MEAN I CAN’T SELL?
JOHN SCAGNELLI: No, it doesn’t mean you can’t sell. It basically means that the extent of that contamination needs to be understood and determined, and the cost to remediate should be estimated. Once you’ve done that, both parties can either agree to an adjustment to the purchase price with either the buyer or the seller addressing the liability before closing, or the seller can accept responsibility and remediate the contamination after the closing. So, no. Finding contamination during due diligence does not mean you can’t sell the property. It means that you have to adjust the parameters of the sales transaction to take that contamination into account.  

JEFF CARNAHAN: The bottom line is you’re going to have to face the possibility that there could be impacts and you need to be willing to devise a plan to deal with that liability in order to get the deal done. In my experience, it’s sort of like playing hot potato with that liability and seeing where it lands.  

DAVID HOFFMAN: In order to do what John suggested you need to utilize an environmental consultant that can vet costs and cost parameters to whatever the condition or problem might be, and you would need to use an attorney that is capable of handling a transaction that has an environmental aspect to it. An attorney with environmental experience can properly set up the transaction in escrow perhaps or use any other mechanisms at their disposal so that the transaction can go forward. 

Learn how to sell a drycleaning business in three steps 

HOW MUCH DOES A PHASE I ESA COST?
DAVID: Phase I Site Assessments are site-specific and they can vary and change depending on the length of time the business was there and the size of the property. So they can vary between $1,500 to $4,000 depending on the property. For example, a single building retail site would fall in the middle of that range.

JEFF: I’d add that Phase I Environmental Site Assessments can be considered commodity work by buyers and sellers and by lending institutions. A lot of times, they’ll see a Phase I as just checking a box because in the world of buying and selling across most industries. Environmental contamination is not an everyday situation. But, with drycleaners it definitely should be anticipated. The reason I bring that up is to warn you to be cautious when looking for the lowest-cost provider. When you’re talking about this much liability, don’t let that responsibility fall into the hands of the lowest-cost provider. Choose your team based on skills and capabilities and past experience. 

Find out the 5 considerations when selecting an environmental consultant

HAVE THERE BEEN CONTAMINATION CASES FOUND AT DRYCLEANERS USING HYDROCARBON SOLVENTS?
DAVID: Yes, but normally the contamination issue that they’re finding is PCE. I would note that hydrocarbon solvents are an environmental contaminant as well, which is why I would recommend conducting the industrial process of your drycleaning plant the same way that you would if it was PCE; have the waste handled by a licensed hauler and document that, so that in the future when someone does the Phase I on a hydrocarbon plant there won’t be any surprises. A lot of the alternative solvent manufacturers are branding and advertising their alternative solvent as “environmentally friendly”, and while it is “environmentally friend-lier” it still can potentially be a contaminant to the environment.

JOHN: Just to add to that, we haven’t seen any court cases with respect to hydrocarbon contamination relating to drycleaners, but the point that David made is correct. Hydrocarbons would still be a contaminant for purposes of many environmental statutes at the state level and would still be considered ultrahazardous activities for purposes of liability in common law. So you’re still going to have to properly manage your use and handling of hydrocarbon-based solvents. If you went outside your back door and threw it outside on the ground it would be considered a “discharge” in virtually all states. We’ll probably start seeing some legal cases about this as PCE is being phased out. You’re still going to have the same concern to handle it and manage it properly, and you’re still going to have to evaluate whether there’s any contamination as part of your due diligence process during real estate transactions.

DAVID: Prior to the existence of safety clean and waste handlers in 1986-1987, drycleaners would put their PCE waste into the dumpster. Since the dumpster normally stayed put, the area around the dumpster outside of a drycleaner is often considered a Recognized Environmental Condition (REC). Like PCE pre-1986, there’s a potential for drycleaners to consider hydrocarbon waste nonhazardous, and put it in the dumpster. If that hydrocarbon leaks out of the dumpster, and in the future hydrocarbon is regulated like PCE is today, we would have a retroactive liability where we’re assessing hydrocarbon contamination beneath dumpsters. So, again, the waste handling procedure for hydrocarbons is just as important as PCE.

WHAT PERCENTAGE OF YOUR PHASE I STUDIES OF DRYCLEANERS LEAD TO A PHASE II?
DAVID: My answer would be most. The reasons being that most drycleaners have been there for a while, we have the REC of the dry cleaning machine, the industrial process of handling the chemistry, the operation of the still, and the waste storage area which is where the safety clean containers are. These are all RECs that require testing and sampling in a Phase II. If we’re talking about a drop store that’s always been a drop store, then those RECs I just mentioned don’t exist.

JEFF: I’d agree with that David, and I wouldn’t just say “most” I’d go one step further and say “most plus.” In my experience, the mere presence of a drycleaner will cause many small business administration lenders to ask for a Phase II despite what the operational history in the databases may show.  

DAVID: The other important thing is that in order to gain the protection and be successful in this process, the environmental professional actually has to look for the contamination and make a diligent effort to find it. The Phase I on the drycleaner that says “no further action” might seem like a good thing on the surface, but without a diligent effort to find environmental contamination, it could create a hodgepodge of legal problems in the future.

IS CONTAMINATION ORIGINATING FROM WASTEWATER (SEPARATOR WATER) MANAGEMENT MORE COMMON THAN LARGER SPILLS?
JEFF: Overall, there have only been a few drycleaners that we’ve worked with that have had recorded larger spills. Very few situations where they said ,”Oh my gosh! We know that we dumped a drum” or “the delivery driver accidentally dragged a hose across the driveway,” but most of the time it’s a series of incidental releases that go unseen and unknown for years that caused the problems. 

DAVID: In the past, the separator water has been an issue that has caused environmental contamination to the site, especially when you combine the older plant that discharged the separator water directly to the sewer, and the sewer being in the form of a septic tank. We see a lot of discharges at septic tanks that are related most likely to the separator water more than to the handling of pure PCE at the plant. I’d add that the conventional sewer lines that go to the municipal sewer are not built to contain the chemistry and ensure that every drop of it doesn’t leak on its route to the sewer plant. So, even if you have a municipal sewer, you can end up with PCE in the ground at the poorly fitted joints in the sewer system.

20 YEARS AFTER A DRY CLEANER HAS LEFT THE LOCATION WOULD A PHASE I LIKELY IDENTIFY THE OLD DRYCLEANERS’ EXISTENCE?
DAVID: The answer is yes because the Phase I does a historical search of the site, the location, and all the prior uses going back to when the site was vegetative in order to meet the requirement. Some of the insurance maps that were drawn long ago still exist and they go back to the 1890’s. 

JOHN: Another implication of this question would be “is it possible to go back after the drycleaner who was on the property 20 years ago for cost recovery for remediation of environmental contamination?” If you’re seeking cost recovery against that drycleaner for cleaning up that contamination 20 years after it left the property, you have to have some proof linking that drycleaner to discharges relating to its operations. 

ARE PHASE II SURVEYS COSTLY?
JOHN: The cost of doing a Phase II is a function of what parts of the property were identified as areas of concern during the Phase I and the different media (soil, groundwater, soil gas, etc.) you are investigating, so your cost will be variable based on those factors. You want to make sure that your environmental professional follows the Phase I results and delineates areas that are suggested by the Phase I results. You want to go as narrowly as possible to accomplish the objective. That said, it’s very difficult to provide any estimate of cost.   

JEFF: To add to John’s point about starting as narrowly as possible, that’s the key. It’s not just “go out and make a science project of this property,” it’s “look at those areas that the Phase I has identified, and hone in on those areas. And, John’s right about the costs of a Phase II varying. That said, I’m personally comfortable saying that a Phase II can range between $15,000 to $25,000. 

DAVID: The reason there’s such a spread is that no one can know the breadth of a Phase II without the results of a Phase I. I would be very suspicious of any Phase II estimate that is given to a client before a Phase I is complete.

IF I’M RENTING AND DON’T OWN THE PROPERTY, WILL MY INSURANCE STILL PAY FOR CLEANUP?
KRISTEN: It depends on when you rented and when you had coverage. If we look back and find historical policies dating back to the mid-eighties or so, and if you had a business owners policy that had a general liability coverage part, absolutely! If you had Pollution Legal Liability (PLL) policies, those can be of use as well. 

JOHN: A little more about PLL policies. These are specialty policies that are taken out if you’re an operating drycleaning business, and they may provide you with both cost of response payment for remediating releases and the defense from liability in third-party legal action. This type of policy is available to property owners as well as renters.

Learn how old CGL policies can help offset environmental cleanup and legal defense costs

IS IT POSSIBLE I DON’T HAVE PERC CONTAMINATION?
JEFF: It really depends on how long your operation was in existence. Do business operations at that location go all the way back to transfer machines? Is it only 10 years old or 30 years old? Was it a Stoddard operation for a while and then transferred to PERC and then back to a different solvent? In EnviroForensics’ experience working with drycleaners, I’d estimate that only 10% ended up having zero contamination.

IF I START THE INVESTIGATION AND CLEANUP PROCESS CAN I SELL MY PROPERTY IN THE MIDDLE OF THAT PROCESS?
JOHN: The answer is yes, you can. If you’re doing a remediation, you’ll likely have your environmental state agency involved in that process and there are provisions in many statutes and administrative agency regulations which would provide for the transfer of titles with permit transfer of title to a property to another party during the remediation process. You might have to post remediation of a bond or an escrow amount relating to it or sign remediation certification of transfer responsibility. Your attorney handling the transaction will have to be familiar with the environmental requirements of the state in which your property’s located and comply with those. 

Learn more about how we can assist in the real estate transactions of drycleaners and other potentially contaminated properties  

GET A BETTER UNDERSTANDING OF THE ENVIRONMENTAL DUE DILIGENCE PROCESS AS IT RELATES SPECIFICALLY TO BUYING OR SELLING A DRYCLEANER

BY: DRU CARLISLE

The sale of a commercial property oftentimes requires a Phase I Environmental Site Assessment (ESA) in order to account for potential liability that may be taken on by the buyer and lender during the transaction. This process is extremely important in buying or selling a drycleaning property due to the historical likelihood of contamination. And, for many drycleaners the prospect of contamination being discovered during due diligence puts artificial restraints on plans of selling their property or passing it down to the next generation.

In this blog post, we will address when you’ll need environmental due diligence, what to expect during a Phase I Environmental Site Assessment and what might determine the need for a Phase II, how to use the results of a Phase I and Phase II in a real estate transaction, and how to use old insurance policies to offset the cost of environmental liability.

WHEN YOU NEED ENVIRONMENTAL DUE DILIGENCE
There are several reasons for a Phase I Environmental Site Assessment to take place such as if you or someone near you is:

1. Buying or selling a property;
2. Refinancing a loan;
3. Having road work done;
4. Has received a letter from a Regulatory agency; or
5. One of your neighbors is conducting a Phase I ESA

WHAT TO EXPECT DURING A PHASE I
A Phase I ESA is a study conducted on a property by a Qualified Environmental Professional (EP) to evaluate the likelihood of environmental contamination, which must follow the American Society for Testing and Materials Engineers (ASTM). When performed correctly, a Phase I ESA will satisfy the All-Appropriate Inquiry (AAI) requirement, which was established by the U.S. EPA to allow buyers of property to avoid taking on environmental liability accidentally. In other words, if you look at a property and actually try to find contamination and you don’t, then you can buy the property and not be responsible for a previous owner’s issue if discovered later.

WHAT HAPPENS IF RECs ARE IDENTIFIED?
If a Recognized Environmental Condition (REC) is identified, the All-Appropriate Inquiry (AAI) process mandates that a Phase II ESA be performed, which includes actual sample collection in the areas of concern. Keeping in mind that to qualify for the liability exemption, you actually have to try and find the contamination. During a Phase II, the EP investigates those areas where they believe there could be a problem and collect soil, groundwater, and/or vapor samples for laboratory analysis. They will most likely only look for the chemicals that they have cause to be concerned about. If the property is a dry cleaner, this usually means that they will need to make a hole in the floor next to current and past drycleaning machines. Other common locations are out the back door, near the current and past dumpster locations, and along the sanitary sewer corridor. If these all come back clean, you can again feel pretty good about things.

WHY ARE ENVIRONMENTAL SITE ASSESSMENTS VALUABLE?
The All Appropriate Inquiry (AAI) is defined and recognized by ASTM and EPA through the federal Superfund Law CERCLA. Essentially, it refers to the method of assessing the environmental conditions in association with a property, as well as liability for potential contamination.

If the buyer is using a bank loan to finance the deal, the bank will require a Phase I ESA so that the property can be used as collateral. They want to make sure that they don’t accidentally acquire a contaminated property if the buyer defaults on the loan. For that reason, any time an owner refinances a loan where the property is already used as collateral, the bank will require a fresh Phase I ESA.

By having the coveted AAI, it means buyers will be confident proceeding in the real estate transaction. If buying or selling, make sure that your environmental consultant knows exactly what they are doing and exactly how to use the ASTM standard to help you avoid liability.

ITEMS WITHIN PHASE I/II ESAs THAT CAN BE NEGOTIATED THROUGH LEGAL COUNSEL DURING A REAL ESTATE TRANSACTION
The first thing to understand about how to use the Phase I ESA in the buying and selling of a drycleaner is the levels of risk and liability that can be up for negotiating during the real estate transaction. The first level of risk is Operator Liability. Operator Liability is related to the managed use of drycleaning chemicals and their proper disposal. The second level of risk is Owner Liability. Property owners can be held liable for contamination even if they weren’t responsible for a spill. This is why an operator who rents their property may have additional environmental conditions in their leasing agreement that need to be met. All of this, of course can be discussed during the negotiation of the contract purchase and sale agreement.

A common variable in real estate transactions is the involvement of a third party bank or lender. The lender will typically have their own environmental requirements relating to the condition of the property. In many instances, the lender may require that certain steps be taken by the buyer on the property to address environmental problems. And, oftentimes, the bank or lender will bring their own environmental consultant in to do their due diligence. From the buyer’s perspective, it’s very important to coordinate these efforts so there isn’t any confusion or duplication of work between the consultants. Some legal counsel will even recommend using the same consultant for both the buyer and the lender, to avoid the duplication issue.

It’s important to be mindful of the various state requirements. A drycleaner will want to make sure their due diligence efforts address both state and federal regulations. For instance, some states will require a buyer to report an environmental impact discovered during due diligence, other states don’t have that requirement because the buyer isn’t technically an owner or operator yet. Some states place restrictions on the type of consultants that are allowed on a property during the sales process. A good rule of thumb is to have legal counsel look into both state and federal requirements and communicate those requirements to the environmental consultant to increase the likelihood of satisfying the AAI requirement.

HOW TO USE OLD INSURANCE TO OFFSET ENVIRONMENTAL COSTS
If there are environmental impacts found during the due diligence process, finding old insurance coverage through insurance archeology can be one way to prevent a deal from falling through. Old policies, or even just evidence of insurance coverage can provide a defense against a claim or suit. In some states, that can be either a letter from the regulatory agency or a neighboring property owner demanding a response to the identified environmental contamination.

Once a Commercial General Liability (CGL) policy is triggered, it can be used to cover legal fees, defense against claims, site investigation, remediation/cleanup, interim remedial measures, building a legal case, potentially responsible parties (PRP) search, interfacing with agencies, and cost recovery for prior remediation measures.

Learn more about Commercial General Liability policies and how they can be used to pay for environmental cleanup

NEXT STEPS FOR DRYCLEANERS PLANNING ON BUYING OR SELLING

Now that some of the Phase I Environmental Site Assessment process has been demystified, and you’re ready to kick off a real estate transaction, we recommend following these four steps:

1. Look into insurance archeology to locate your old coverage
If you’ve sat in on any of our webinars or presentations, you’ve probably heard us preach that looking into your old insurance policies should be the first thing you do. Period. Finding out how much money you have available to you from a source other than your own bank account will help lay the groundwork for how to address contamination should it be found at your site.

2. Find an environmental consultant that has experience with drycleaners
It’s important when choosing an environmental consultant to make sure that the consultant you choose to work with has extensive experience with investigating and remediating chlorinated solvent contamination. Truly understanding historic drycleaning operational history as well as experience with investigating dry cleaner sites is needed to be able to locate true source areas..

3. Find an environmental attorney who understands real estate law, environmental law, and how to use insurance
It’s also important when hiring legal counsel that you look for an attorney who not only understands environmental law, but who also understands the nuances of using insurance. Every state’s case law is different in how they apply real estate laws, environmental laws and statutes, and also in how they interpret key insurance coverage points as they relate to using old insurance policies to help cover cleanup costs, and having legal counsel to help you navigate all of this will be key.

4. Carefully prepare for the transaction
It’s important to carefully prepare for your transaction – both as a buyer and as a seller – consult an attorney, consult your environmental consultant, make sure your team is coordinating, and make sure you cover all of your bases so surprises don’t derail your deal.

Watch the National Clothesline webinar “Why Phase I Environmental Site Assessments are Important for Buying or Selling a Drycleaner”

 

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Dru Carlisle, Director of Dry Cleaner Accounts
For over 10 years, Dru has helped numerous business and property owners facing regulatory action, navigate and manage their environmental liability. Dru has vast experience in assisting dry cleaners in securing funding for their environmental cleanups through historical insurance policies. Dru is a member of numerous drycleaning associations in addition to serving on the Midwest Drycleaning and Laundry Institute (MWDLI) advisory council and on the Drycleaning & Laundry Institute Board (DLI) as an Allied Trade District Committee Member.

WHAT TO EXPECT DURING REAL ESTATE DUE DILIGENCE PROCESS AND HOW TO USE THE RESULTS TO MANAGE POTENTIAL LIABILITY

We are getting a lot of requests these days for Phase I and Phase II Environmental Site Assessments (ESAs), which is an indicator of an increase in the number of property transactions taking place. There seems to be a lot of property activity in the dry cleaning industry right now, or there is about to be. I want to explain the Phase I and Phase II ESA process because many environmental contamination issues are discovered during Phase I due diligence efforts. In fact, the property transaction process is a major business driver for the environmental remediation trades. Performed and utilized correctly, a Phase I ESA can help you make very important decisions about managing your environmental liability. If not performed correctly, or the findings not heeded, you may inadvertently step into the pathway of a big environmental problem.

WHAT IS A PHASE I ENVIRONMENTAL SITE ASSESSMENT?
A Phase I ESA is a study conducted on a property by a qualified Environmental Professional (EP) to evaluate the likelihood of environmental contamination. There is a standard that must be followed by the EP that was created by and periodically updated by the American Standard for Testing and Materials (ASTM). The protocol was established to provide a consistent method of evaluating environmental contamination issues that can be relied upon amongst and between various industries and users. When performed correctly, a Phase I ESA will satisfy the All-Appropriate Inquiry (AAI) requirement, which was established by the U.S. EPA to allow buyers of property to avoid taking on environmental liability accidentally. In other words, if you look at a property and actually try to find contamination and you don’t, then you can buy the property and not be responsible for a previous owner’s issue if discovered later.

THE PHASE I ENVIRONMENTAL SITE ASSESSMENT PROCESS IN 5 STEPS
The process of performing a Phase I is similar for every property transaction, but the effort required and price change according to the size of property, the number of years the property has been used for commercial or industrial purposes, and the overall environmental health of the property.

Step 1: Review Client Questionnaire
The first step is to document information from the client of the Phase I ESA so that the intended purpose of performing the assessment is properly documented. This is a very important and often overlooked detail. A questionnaire is sent to former owners and operators of the property containing questions about their knowledge of any environmental issues or property uses that might have led to contamination. Remember, you actually have to make an effort to find any problems for the All-Appropriate Inquiry (AAI) standard to be met.

Step 2: Review History To Determine Past Use and Regulatory Records For Site and Surrounding Properties
The next step is to review a multitude of historical and contemporary sources of information that provide a view of the environmental property conditions. These include old aerial photographs, city directory information, old phone books, historical fire insurance maps, and others that document land use through the years. Regulatory databases are also reviewed to see if the subject property has any sort of environmental footprint in the form of permits, waste manifests, hazardous material reports, etc. Essentially, if we can find anything that indicates there has been some risky land use in the past, we have to document it.

Step 3: Site Walk and Reconnaissance
It is also necessary to perform an inspection of the property and record what current land use and environmental conditions look like. If there are ongoing commercial or manufacturing processes, the EP has to observe and assess if products are being used or wastes being generated that could contributing to an environmental problem. Using the example of a dry cleaner; the EP would need to go into the store and have a look at the condition of the machine(s), see how the waste is handled, look for things like the location of floor drains that may be close to the drycleaning machine, and take notes about the general cleanliness of the facility. There can also be a lot of information gathered about past operations. Was there an old drycleaning machine in a different part of the building, did there used to be a different building altogether somewhere on the property, or was there an underground storage tank out back that hasn’t been used in decades?

Step 4: Interviews With Site Contacts and Local Agencies
Information regarding historical use is collected not only from visual evidence during the site walk, but also during interviews with people who are familiar with the activities at the property today, and in the past. Information is also requested from local agencies such as the fire department, to document if there has been a fire at the property that could have resulted in a release of chemicals to the subsurface.

Learn the answers to 7 common questions about PCE spills.

It’s not just the property itself that you have to evaluate; the potential that environmental conditions on a neighboring property may have crossed onto the property being assessed must also be considered. If you are a dry cleaner and one of your neighbors is performing a Phase I ESA on their property, their consultant is going to be looking at you! That is precisely how so many dry cleaners get pulled into this process.

Step 5: Submit Report to Client
After all these efforts, the EP then creates a standardized report that presents the findings of the Phase I ESA. Anything concerning that has been identified will be evaluated in accordance with the ASTM standard, and decisions will be made about defining that concern as a Recognized Environmental Concern (REC). Basically, if there are no RECs, then the property appears to have no environmental problems, and the purchaser of the property can put the Phase I report in their files and feel pretty good about things.

WHAT IS A PHASE II ENVIRONMENTAL SITE ASSESSMENT?
If RECs are identified by the consultant because there appears to be an environmental concern at the property, then the All-Appropriate Inquiry process mandates that a Phase II ESA be performed, which includes actual sample collection in the areas of concern. Keeping in mind that to qualify for the liability exemption discussed above, you actually have to try and find the contamination, if it exists. During a Phase II, the EP is going to go to those areas where they believe there could be a problem and collect soil, groundwater, and/or vapor samples for laboratory analysis. They will most likely only look for the chemicals that they have cause to be concerned about. If the property is a dry cleaner, this usually means that they will need to make a hole in the floor next to current and past drycleaning machines. Other common locations are out the back door, near the current and past dumpster locations, and along the sanitary sewer corridor. If these all come back clean, you can again feel pretty good about things.

Learn what you should do if Phase II has uncovered RECS.

WHO NEEDS A PHASE I OR PHASE II ESA?
There are several reasons for the environmental due diligence process to be undertaken. Who needs the protection that the completion of the AAI process provides? The buyer of a commercial property clearly needs a Phase I ESA. If the buyer is using a bank loan to finance the deal, the bank will require it so that the property can be used as collateral. They want to make sure that they don’t accidentally acquire a contaminated property if the buyer defaults on the loan. For that reason, any time an owner refinances a loan where the property is already used as collateral, the bank will require a fresh Phase I ESA.

HOW MUCH DO PHASE I ESAS AND PHASE II ESAS COST?
Phase I ESAs are not that expensive for most commercial properties. It takes time to perform the necessary tasks, and the level of experience and expertise needed is pretty high. Since there are so many conducted in the market, Phase I ESAs have been commoditized and you definitely get what you pay for. I’ve seen them go for an average of $2,000 to $4,000 for properties less than an acre in size with average commercial land use, depending on regional cost variables. If the property is large, or there is a manufacturing usage, or if there are many indicators that the assessment will take more time to complete, the price will go up considerably. Most factories require a Phase I ESA that costs in the $8,000 to $10,000 range.

The cost of Phase II ESAs, where sampling occurs, totally depends on how many areas of concern need to be assessed. Using the typical dry cleaning facility example used above consisting of samples being collected near the DC machine, back door, dumpster and utility corridor, I’d say an average of $10,000 to 15,000 will let you know if there is a problem or not.

Please don’t take this the wrong way, but this is not an area where you want to automatically choose the lowest price. Please make sure that your environmental consultant knows exactly what they are doing and exactly how to use the ASTM standard to help you avoid liability. If you buy a cheap scarf, your neck might get cold; but if you buy a cheap Phase I ESA, you might regret it forever.

Learn more about our real estate due diligence services.

As seen in Cleaner & Launderer

LEARN HOW TO SHIELD YOURSELF FROM HISTORICAL LIABILITIES 

BY: JEFF CARNAHAN

Let’s start with a well-known fact: Many dry cleaners lease their locations rather than own them. This makes perfect business sense in many situations. However, if there were other dry cleaners operating at that property before you moved in or bought the business you could find yourself being blamed for someone else’s contamination at some point. A recent conversation with a couple of drycleaning operators amid this exact scenario has led me to prepare a few pointers to help protect yourself from someone else’s environmental liabilities.

FIRST – EACH PROPERTY HAS A HISTORY 

Among those in the community that draw a line between dry cleaners and contamination, a common misconception is that the current drycleaning operator today is causing a pollution issue. Those of us within the industry understand that most likely, that is not the case. Most drycleaning operators are presently operating under best case conditions designed to specifically avoid an environmental release. These include:

• The use of state of the art, or latest generation closed-loop equipment that has been engineered to prevent the escape of solvent;
• The use of secondary containment spill prevention devices that are either part of the equipment or installed in addition;
• Operating under a set of regulatory guidelines and best management practices intended to minimize spills and exposures; and
• Operating in accordance with very specific waste solvent disposal methodologies, again intended to avoid the improper disposal of hazardous substances.

It is understood, however, that these practices were not always implemented by dry cleaners in the past. As time moved forward in the industry, these standards were developed in response to an increase in technological advancements related to efficiency and an increasing knowledge about environmental concerns and consequences of solvent releases. Thus, it is more likely that spills or releases of solvents to the subsurface occurred in the past than in the present. The old transfer machines were more prone to inadvertent spills than newer machines. Virgin and waste solvent handling practices were less defined back then. The information regarding the harmfulness of drycleaning solvents to the subsurface was mostly non-existent or not widely known by those in the industry. Non-toxic solvents that are in use today hadn’t even been perceived back in the day. Sitting here in 2020, it is far less likely that a release of Perc would occur at a drycleaning plant today than back in 1950, 1960, 1970, or even 1980 and beyond.

Read more about the history of drycleaning solvents and the evolution of the drycleaning machine.

SECOND – HOW TO DISTANCE YOURSELF FROM HISTORICAL LIABILITY

The most important things you can do as a contemporary drycleaner who is trying to lease a space and avoid being blamed for someone else’s mess is to ask questions about the history of the property you want to lease. Preferably, this should be done before you start to operate at the leased location. Let’s put this into perspective with a few examples of common leasing scenarios encountered by drycleaners and talk about some ways that you can protect yourself.

Scenario 1

You are opening a new cleaning business, that includes the use of drycleaning or spotting chemicals that contain regulated hazardous chemicals, and you are leasing a space where there has been no history of drycleaning.

Ask your landlord to share any environmental due diligence that was performed when the property was acquired. If the commercial property changed hands within the past 20 years, there is a very good likelihood that a Phase I environmental assessment was conducted and a report was submitted, which should be in their files. This report would lay out the history of property usage and detail any operations that were performed on or near the site that could have potentially impacted it. If the report is too old, and there may have been another business operating there which may have caused environmental contamination, you may want to address it with the property owner.

You may even want to perform your own Phase I so that you can document the history of the site for yourself. From there, you are going to want to keep very clear documentation of your processes and your chemical purchases to show that you aren’t contributing to an environmental release. Even if there is a very, very little probability that your operations are going to cause an environmental problem, you will be the first person they talk to if they find someone else’s problems.

Read more about Phase I and Phase II Environmental Site Assessments.

Scenario 2

You are moving your drycleaning operation business, which includes the use of dry cleaning or spotting chemicals that contain regulated hazardous chemicals, into a leased facility where others have operated in the past.

Just as in the previous scenario, talk to your landlord before you sign a lease. Understand how many former drycleaning operators were there before you and take the necessary steps to separate and document your operations from those of the past. What you really want to know is, “Is there already contamination at this property that was caused by others, before I got here.” If there has been, then you want to be indemnified for that known contamination. The best way to tell if that condition exists is to demand that some environmental sampling be performed to establish the baseline conditions that are already present before you sign the lease and start operating at that location. As a business owner who is entertaining the idea of signing a long-term lease with the property owner and thereby fulfilling the landowner’s business model by giving them money every month for a long time; you certainly have the right to ask for that.

It is a possibility that the landowner may refuse to perform a baseline environmental assessment, or even allow you to perform your own. If that is the case; be careful. Any promises made across the bargaining table regarding you not being blamed for contamination found later, without proper documentation in the lease, could quickly fall by the wayside if the landowner suddenly gets sued by an adjacent property owner who finds dry cleaning solvents on their own property. I know that it can be a challenge to find a landowner willing to lease to a solvent plant these days, but if you have to expose your business to the risk of someone else’s historical environmental pollution, is it worth it?

Scenario 3

You are buying a drycleaning business that used to operate one or more Perc machines at the location for many years, and you want to stay in the same location with the same brand.

First, do what you can to purchase only the assets and goodwill of the business. Get professional advice from an attorney or a broker to help you craft a deal that will, again, help you to separate your operations from past operations. You will be at the mercy of the landowner regarding their allowance to perform a baseline environmental assessment. Also, just as in Scenario 2, however, the landlord will hopefully be motived to assist you in exchange for an extended lease.

If you are required to inherit the balance of the lease as part of the business purchase and you are not allowed to perform a baseline environmental assessment, you may want to consider changing your operations away from anything that would muddy the distinction between your operations and the previous operations. For example, perhaps you may decide to eliminate the use of Perc and other chlorinated solvents. That way, if a problem is identified later down the road, you’ll be able to prove that you are blameless. It is also important to have clear and detailed documentation, so give it some clear thought in advance and give yourself a clear exit strategy.

Another useful tool in this scenario would be a new environmental liability insurance policy. This would not necessarily cover the cost of a spill, since you theoretically don’t have that risk, but rather to cover you in the case you are blamed for a contamination problem.

Read more about how drycleaners can maximize value in real estate transactions.

We talk a lot about what to do if you are identified as a potentially responsible party for an environmental contamination issue because we’ve helped drycleaners face these challenges for over 20 years. We understand the nuances and different types of scenarios drycleaners can face. Fortunately, most businesses and landowners have historical insurance coverage that can be used to pay for environmental cleanup without breaking the bank. If you can make the right moves and avoid inheriting someone else’s environmental liability, it’ll make your experience that much better.

As seen in Cleaner & Launderer

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Jeff Carnahan, President
Jeff Carnahan, LPG, has 20+ years of environmental consulting and remediation experience. His technical expertise focuses on the investigation and interpretation of subsurface releases of hazardous substances for the purpose of evaluating and controlling the risk and cost implications. He has been a partner of the drycleaning industry for the past decade, and is a frequent contributor to the national drycleaning publication Cleaner & Launderer. He is an industry leader in understanding that environmental risk includes not only cleanup costs, but also known and unknown third-party liability.

ENVIRONMENTAL CONTAMINATION ISSUES CAN SERIOUSLY IMPACT COMMERCIAL PROPERTY AND BUSINESS DEALS. IN THIS BLOG, WE’LL EXPLAIN HOW TO GET THE MOST MONEY FOR YOUR REAL ESTATE OR BUSINESS TRANSACTION AND HOW TO PROTECT YOURSELF DURING THE PROCESS WITH ENVIRONMENTAL, FINANCIAL AND LEGAL COUNSEL. YOU’LL LEARN HOW TO MINIMIZE YOUR RISK BY PREPARING FOR UPCOMING REAL ESTATE TRANSACTIONS AND INCREASE VALUE WITH ALTERNATIVE FUNDING OPTIONS AND EXPERT RESOURCES.

As environmental consultants, we keep a close eye on commercial real estate trends, and we’ve recently seen indicators that the commercial real estate market is experiencing a recovery and transactions are on the rise in response to falling interest rates. We’ve also seen an increase in the buying and selling of businesses, as investors look for strategic opportunities to pick up a struggling business for cheap. 

WHAT DOES THIS CHANGE IN REAL ESTATE TRENDS MEAN FOR THE DRYCLEANING INDUSTRY?  

The current economic downturn and the associated market disruptions will be another catalyst of change for the drycleaning industry. Drycleaner owners need to consider if now is the right time to buy, sell or refinance their business or property. 

All three of these options will likely prompt environmental due diligence activities like Phase I and Phase II Environmental Site Assessments (ESAs) as businesses change hands, properties are sold, or banks re-evaluate loans. Environmental contamination problems could be identified during this process, so now’s a good time to evaluate your options, strategy and environmental preparedness.    

WHAT LEGAL LIABILITIES DO YOU NEED TO CONSIDER AS A BUYER OR A SELLER? 

It’s important to consider the legal implications of these real estate transactions and the environmental due diligence through your strategy – so it may be wise to consult a real estate attorney to help navigate your deal. Simply taking advantage of the low-interest rates can trigger the need for more collateral to secure bank loans. A few examples for drycleaners include:    

• Selling your business or merging with another drycleaner 
• Refinancing your bank loan for a better interest rate 
• Acquiring new machines or a vehicle 
• Adding on a new addition or remodeling the business 
• Buying a new location like a drop plant 

Any time a lending activity in the commercial sector involves the use of an owned property as collateral, there is going to be a reassessment of the property’s value, and that is going to include an evaluation of its environmental condition. Especially if it’s a property with a history of drycleaning operations. It’s an unfortunate truth that drycleaners typically will be required to do a phase II just because they are a drycleaner. Sometimes it’s inevitable and unavoidable, especially when you’re not in control of the due diligence like in the case of a neighbor or landlord selling or refinancing.  

A lot of times people wait until after they are facing an environmental contamination issue head-on to look for funding options, maybe they are being sued or have received a letter from their regulatory agency, but either way, now they’re in a reactive position trying to find a way to pay for the hefty cost of cleanup. 

There are funding options available to drycleaners that include insurance options to buffer risks like historical commercial general liability (CGL) insurance policies or purchasing Pollution Legal Liability (PLL) insurance if you don’t already have it. You can add value by purchasing PLL policies, especially if you are unable to locate historic CGL policies or are interested in an extra layer of protection. Pollution policies can cover new conditions at a site from the inception of the policy and onward or for unknown pre-existing conditions. PLL policies focus on the costs and risks associated with potential contamination both on and off the property, as well as unanticipated contamination found during site cleanup and/or redevelopment. These policies can be used as a nice addition to your funding strategy to save deals and manage legal liability. 

HOW CAN  YOUR OLD COMMERCIAL GENERAL LIABILITY (CGL) INSURANCE POLICIES ADD VALUE TO YOUR DRYCLEANING BUSINESS? 

CGL insurance policies protect the policyholder from third party liability. For a drycleaner, historical CGL policies directly from the policyholder or from predecessors that pre-date any absolute pollution exclusions can be used to help pay for environmental investigation and cleanup costs. These policies should typically pay for the site investigation to determine the nature and extent of the contamination, legal defense fees, contamination remediation, locating any other responsible parties who should also be held liable for the contamination and interfacing with the regulatory agency on your behalf.  

There are three different ways that CGL insurance policies can add value to your drycleaning business.  

1. Be proactive and pull together insurance information to create a safety net in case environmental issues are uncovered down the road.  

These policies can be worth millions of dollars. Add value to your business by giving yourself that cushion. If you’re prepared for the future, it’ll be less stress and less money out of pocket to formulate a strategy if you know what kind of coverage you have available to you. This first scenario is really the most ideal to pull together your policy information without a deadline – and if you’re unable to locate it yourself, you can hire an Insurance Archeologist to help you track it down.  

2. If you’re already in the environmental due diligence, it’s time to pull together a team of experts to formulate a strategy.  

When you’re unprepared, environmental contamination is going to be a disruption. It can cause a business or property owner substantial stress about how they are going to react to the news of contamination. But this stress can be avoided with the right team in place to help you weather this storm. Addressing the environmental contamination by cleaning it up will add value back to your property, so it’s a win-win situation. Plus, you’ll be off the hook with the regulatory agencies. 

3. If you’ve already spent money out of pocket for environmental investigation and cleanup costs, you may be able to recoup the money.   

You may not be able to recover all that has been spent but you’ll be able to put money back in your pocket. That is certainly more valuable than being out whatever was spent on cleanup efforts in the first place. 

As you can imagine, as we get further away from the 1985 Absolute Pollution Exclusion (APE) timeframe, the more difficult it can become to track down usable policies that can protect you from environmental liability. And this is exactly what insurance archeology is for, but the further you get from the APE, the more likely it is that the records have been destroyed and potential leads are diminished.  

Now is a good time to look at pulling together your own policies, and if you find that you’re having difficulty locating policy information on your own, don’t give up. Consider hiring a professional insurance archeologist to be a part of your team.  

WHAT’S YOUR NEXT STEP? 

So, whether you’re the buying, selling, or refinancing a dry cleaning business, pulling together any applicable insurance policies to address any unwelcome environmental contamination can not only save a real estate transaction or lending deal, but it can add value to the property. For the seller it will show there is a funding source to address contamination, which would otherwise devalue the property. And for the buyer, who knows that the property’s environmental issues are being addressed now, so that if later down the road they want to sell, they have peace of mind that its free and clear of contamination. Call an environmental consultant who can coordinate your team to maximize your business value.  

Watch to the webinar recording to hear what fellow drycleaners asked during the Q&A portion.

Special thanks to DLI and Rubin & Rudman for their partnership on this webinar.