Preparing for PFAS in Commercial Real Estate

BY: CASEY MCFALL, CHMM

You may (or may not) have heard of PFAS (per- and polyfluoroalkyl substances) and the recent U.S. EPA announcement designating two PFAS compounds as hazardous substances. There’s been a lot of doom and gloom posted about PFAS recently and while their hazardous substance designation will have effects that trickle down to commercial real estate, all is not lost. Below is a quick summary of what PFAS are and some immediate effects you may see in commercial real estate beginning July 8, 2024, when two (2) common PFAS compounds officially become hazardous substances.

WHAT ARE PFAS?

PFAS are a group of 9,000+ chemicals developed in the 1930s used in water-resistant textiles, paper products, non-stick coatings, and cleaning products. They are found in items like shampoo, cosmetics, non-stick cookware, stain-resistant or waterproofing products, fast food packaging, paints, and pesticides. Biosolids from sewer treatment plants, used as fertilizer, and aqueous film-forming foam (AFFF) used for fire suppression, can also contain PFAS. Electronic manufacturing and electroplating operations use PFAS too.

PFAS breaks down slowly in the environment, easily travel through groundwater, and can bioaccumulate in humans and animals. Research links PFAS exposure to health concerns in humans and animals.

REAL ESTATE IMPLICATIONS

Until recently, PFAS were regarded as emerging contaminants and were not officially listed as CERCLA hazardous substances. Two (2) common PFAS compounds (known as PFOA and PFOS) will become CERCLA hazardous substances on July 8, 2024.  Below are four ways the hazardous substance designation of these PFAS compounds may affect commercial real estate transactions going forward.

  1. Environmental screening levels for PFAS are very low and PFAS may be found at lots of properties. Studies have shown that PFAS can cause issues at very low levels in the environment; for example, common petroleum compounds are assessed at a part-per-billion (ppb) level; PFAS compounds are assessed at a part-per-trillion (ppt) level, a thousand times lower. PFAS do not easily breakdown and can readily travel when they encounter groundwater. PFAS may be present at many properties, even if the historical or current operations may not have directly used PFAS. Types of businesses that may have PFAS impacts includes, but is not limited to laundromats, car washes, dry cleaners, airports, firefighting training facilities, electronic manufacturers, oil refineries, plastic and paper mills, landfills, metal platers, and any business where non-stick or waterproofing applications are applied.
  2. PFAS will now be a consideration in Phase I ESAs. Historically, PFAS were considered out-of-scope items for Phase I ESAs, as the ASTM standard only calls for assessing CERCLA hazardous substances and petroleum products. Beginning July 8, 2024, the PFAS compounds PFOA and PFOS will need to be assessed during Phase I ESAs.
  3. A current Phase I ESA may identify PFAS as an environmental concern at properties where historical Phase Is may have not identified environmental concerns. PFAS were used in many processes and operations that were previously not considered issues. For example, laundromats (with no dry cleaning operations) and farm fields may have environmental concerns due to PFAS, whereas they may not have had issues previously. Other facilities, such as dry cleaners or electroplating operations, may have identified environmental concerns in their past Phase I and Phase II ESAs, but those historical reports likely did not address PFAS.
  4. Cost for environmental sampling (i.e., Phase II ESAs) may increase. PFAS sampling techniques can require increased time and stringent procedures to ensure cross-contamination will not occur. Laboratories will also need to analyze PFAS samples at extremely low levels, which will likely increase analytical costs. For example, analysis of groundwater for dry cleaning compounds is roughly $80 – $100 per sample. Current groundwater analytical costs for a PFAS sample can start in the high $300s and go up from there.

The bottom line is that the impending designation of PFAS as a hazardous substance may have far-reaching effects in the environmental world; however, this does not mean the sky is falling. Property owners and prospective purchasers should be aware of these upcoming regulations and a trusted environmental consultant can help guide you through the next steps.

EnviroForensics has a proven track record of helping business owners through environmental investigations and cleanup, often while business goes on as usual. EnviroForensics may be able to help find historical insurance to fund the investigation or connect you with third parties who can manage environmental liabilities for property owners or even purchase contaminated properties.

If you have questions regarding PFAS or any other environmental matter, please contact us at your convenience.

Casey McFall is the Director of Real Estate Services and Senior Scientist for EnviroForensics, LLC. Mr. McFall can be reached at 463-212-1815 or via email at cmcfall@enviroforensics.com.

Potential PFAS Designation to Alter Environmental Due Diligence Landscape

BY: CASEY MCFALL, CHMM, AND DELANIE BREUER

A change is coming to the environmental due diligence world, which is anticipated to play a factor in how recognized environmental conditions (RECs) (i.e., known or potential environmental concerns) are identified in future Phase I Environmental Site Assessments (ESAs). The change is the potential designation of at least two per- and polyfluoroalkyl substances (PFAS) as a “hazardous substance” under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), also known as Superfund.

Most people, may not be aware of how this designation could dramatically alter Phase I ESA conclusions or significantly impact future commercial real estate due diligence. To assist with understanding the potential impacts of this designation, below are some of the frequently asked questions we’ve received from brokers, real estate agents, property owners, prospective purchasers and financial institutions regarding PFAS and its anticipated CERCLA designation.

WHAT ARE ENVIRONMENTAL DUE DILIGENCE AND PHASE I ESAS?

Often, prospective purchasers and financial lenders, will want a Phase I ESA completed for a property prior to the acquisition or finalizing lending. Completing a Phase I ESA correctly prior to a property purchase affords the purchaser some protection from liability for environmental contamination existing on the property prior to the purchase.

Very simply, a Phase I ESA is a commercial environmental assessment; the purpose is to identify known or potential environmental concerns for a property based on historical and current operations and nearby neighboring operations so they can be considered when negotiating and finalizing the transaction. Samples are not generally collected during a Phase I ESA: records are reviewed, a property visit is completed, and a determination is made on whether RECs exist on a property. Depending on the findings of the Phase I ESA, a Phase II ESA, (collecting environmental samples), may follow a Phase I ESA.

WHAT ARE PFAS AND WHY ARE THEY AN ENVIRONMENTAL CONCERN?

PFAS are a group of 9,000 or more chemicals that were first developed in the 1930s and are widely used in everyday products, including as the main ingredients in developing water-resistant chemicals textiles and paper products, nonstick coatings, and cleaning products. PFAS are also prevalent in aqueous film-forming foam (AFFF), which is used to suppress particularly volatile fires primarily by municipalities, airports and maritime fire departments. Electronic manufacturing and electroplating operations also used PFAS in their operations.

Historically, PFAS have also been found in many widely used items such as shampoo and cosmetics, non-stick cookware, stain-resistant or waterproofing products, fast food packaging, paints, and pesticides. Biosolids from sewer treatment plants, which can be used as fertilizer for farm fields, can also contain PFAS from the upstream sources that discharge to the municipal sewer system (i.e., personal machines or commercial laundry services used to wash “waterproof” clothing, industrial facilities that use PFAS chemical, etc.).

A PFAS compound can be identified by its carbon-fluorine bond, which is exceptionally strong and gives the compounds many of their useful properties. However, this also means PFAS substances are slow to break down in the environment. PFAS easily travel through environmental mediums like groundwater, and some PFAS can bioaccumulate in humans and animals. Though research on these compounds is ongoing, some studies have linked PFAS exposure to health concerns in humans and animals, which prompted the proposed CERCLA designation as a hazardous substance.

As noted, there are over 9,000 PFAS compounds, but the two most widely used and most studied PFAS are Perfluorooctane Sulfonate (PFOS) and Perfluorooctanoic Acid (PFOA).

WHAT DOES THE “HAZARDOUS SUBSTANCE” DESIGNATION MEAN AND WHY AREN’T PFAS ALREADY BEING ASSESSED AS PART OF PHASE I ESAS?

A hazardous substance designation means that the federal and state regulators can force environmental investigations and require cleanup or remediation of these substances when they are released to the environment, or some cases, when they are discovered on a property even if it is unknown when or how they were released. All chemicals proposed for hazardous substance designation must undergo a rigorous evaluation prior to designation.

Although PFAS have been around since the 1930s, only recently have scientists made a link between PFAS and their adverse health effects. Specifically, many of the studies have focused on PFOA and PFOS. These two compounds and their salts and isomers were first proposed for hazardous substance designation in September 2022. Currently, it is widely believed that the hazardous substance designation for these PFAS compounds will likely occur within the next 6 to 12 months based on an April 2023 notice from the U.S. Environmental Protection Agency (EPA).

When assessing properties for potential contamination through a Phase I ESA, industry standards do not require PFAS to be evaluated because they are not petroleum products or CERCLA-designated hazardous substances. The ASTM standard for preparing Phase I ESAs (ASTM E1527-21) states that only petroleum products or CERCLA-designated hazardous substances must be considered when identifying RECs. PFAS may be considered as an out-of-scope item, the same as asbestos-containing materials (ACM) or lead-based paint, but an assessment is not currently required.

HOW WILL THE PFAS HAZARDOUS SUBSTANCE DESIGNATION AFFECT COMMERCIAL PROPERTY TRANSACTIONS?

Properties that would not previously have had RECs identified in a Phase I may now have an identified REC based on the potential for PFAS contamination. Because PFAS has been so prevalent in manufacturing, and can move freely through the environment, this has the potential to impact many properties.

For example, laundromats that have never housed dry cleaning operations would be unlikely to have a REC identified in a current Phase I ESA. However, studies from Florida have shown that laundromats may have PFAS present from waterproof, or stain resistant coatings being stripped off from laundered clothes. Another pertinent example could involve farms that have applied biosolids from municipal sewer treatment plants as fertilizer on their fields. Studies have shown these biosolids may contain PFAS and have the potential to leach into soil and groundwater, thereby causing a potential environmental issue. Agricultural fields by-and-large have not been an environmental concern in Phase I ESAs, although this could change under the upcoming PFAS hazardous substance designation.

SHOULD I TEST FOR PFAS?

The answer to this question is “it depends.” The variables to be considered include the historical use of the property (i.e., could the operations have caused or contributed to PFAS in the environment); the historical use of nearby properties, from which PFAS could potentially have migrated; whether you own or are purchasing the property; and how the discovery of PFAS may impact you.

For example, in some states, even discovering a small amount of PFAS may trigger reporting and potential remediation requirements, so although a potential buyer may wish to test for PFAS, the seller may be less inclined.

The location of the property, and the applicable state and local regulations, also play a key role. In Indiana, for example, there are not currently requirements for PFAS testing during environmental investigations. However, in Wisconsin, state regulators require an evaluation of potential PFAS on the property. If PFAS is known or suspected to be present, the regulators may require testing, and reporting and potential remediation if any amount of PFAS is discovered on a property, regardless of the source of contamination. The best advice is to consult with your attorney and environmental consultant to determine the risks and benefits of PFAS sampling based on your circumstances.

If and when PFAS are designated as hazardous substance under CERCLA, the choice on whether to sample or not for PFAS will change to a requirement based on REC findings.

The bottom line is that the impending designation of PFAS as a hazardous substance may have far-reaching effects in the environmental world. This, however, does not mean the sky is falling. Property owners and prospective purchasers should be aware of these upcoming regulations and a trusted environmental consultant and attorney can help guide you through the next steps.

EnviroForensics and Fredrikson & Byron have proven track records of helping dry cleaners and laundromats through environmental investigations and cleanup, often while business goes on as usual. In some instances, EnviroForensics may be able to help find historical insurance to fund the investigation and cleanup.

If you have questions regarding PFAS or any other environmental matter, please contact us at your convenience.

Delanie Breuer practices environmental law at Fredrikson & Byron P.A. in Madison, Wisconsin. Ms. Breuer can be reached at 608-453-5135 or via email at dbreuer@fredlaw.com. Casey McFall is the Director of Real Estate Services and a senior scientist for EnviroForensics, LLC. Mr. McFall can be reached at 317-972-7870 or via email at cmcfall@enviroforensics.com.

As seen in Cleaner & Launderer.

How to Save a Transaction on a Contaminated Property

BY: STEPHEN HENSHAW, LPG

Your business day starts out like any other; you grab coffee on your way to work and turn into the parking lot. But your heart sinks when you see a group of technical people standing near a small drill rig. Now you are worried sick that soil and groundwater samples will reveal the dreaded environmental contamination, and you’ll have no good options for the future.

This scenario is all too common in the drycleaning industry, but a bad outcome doesn’t have to happen if we step back and reflect for a moment. We can ask what is driving the investigation. This will help us understand why taking samples is a necessary and desired step. For example, is the investigation being required by a regulatory agency because there is a potential public health threat? Or is the investigation being driven by a lender involved with refinancing the property or in financing a buyer?

If the investigation is driven by the regulatory agency, you will want assistance in understanding the magnitude of the problem and how to minimize or mitigate the immediate public health threat. There are a number of steps that can be undertaken to address the public health threat, and these do not need to break the bank. Oftentimes, regulators will work with a dry cleaner; however, we recommend getting professional advice from an experienced and qualified environmental engineer to ensure that the requested work, usually expensive, is actually necessary.

Commonly, an investigation is driven by a lender, and different steps are taken to address their concerns.  Remember that when a lender is refinancing or lending money on a property transaction, they require a Phase 1 environmental site assessment.  If a dry cleaner is (or has ever been located on the property), a bank will require a Phase 2 investigation, which includes collecting soil and groundwater samples to analyze them for the presence of volatile organic compounds, or VOCs. If the solvent Perchloroethylene (PCE) and its chemical breakdown products, all classified as VOCs, are present, the levels will show up in a laboratory scan.

If VOCs are present in soil and groundwater samples, a lender will very likely walk away from the sale, because banks are typically risk averse. They don’t want to lend on a contaminated property when the value or collateral is in that property. They don’t want to be in a position to have to “take back” the property when the lendee defaults because no one will buy the contaminated site. If you’re the property owner, or are operating as a drycleaner on that site, all of the negative attention will be on you or your business as the reason the deal fell apart. Even if you can pay for the expensive environmental cleanup, with costs ranging between $500,000 to $2,000,000, regulatory site closure can take years.

One very effective solution is to buy an insurance policy called a Lender Liability Policy.  A Lender Liability Policy is designed to activate if the borrower defaults. This policy can enable the landlord (or a buyer) to get bank financing and help all parties get some breathing room. This is what a Lender Liability Policy does:

  • Covers the lender in the event the borrower defaults by paying the cleanup costs or paying off the loan balance;
  • Covers Toxic Tort claims from third parties;
  • Covers known and unknown site conditions;
  • Provides a lender comfort in financing on contaminated properties;
  • Allows for the policy to be transferred and assigned for the life of the loan (for a period typically less than ten years).

The cost of a $2,000,000 Lender Liability Policy may cost between $60,000 and $90,000. That cost will vary depending on factors such as the creditworthiness of the borrower, the loan amount, and the actual estimated cleanup cost. The cost of a policy, when compared to losing an asset entirely, is often the best solution for saving deals, but few drycleaners or their attorneys, know this option is available.

When you consider all things, a Lender Liability Policy is an excellent way to facilitate a loan on a property transaction or the refinancing of a property where environmental contamination is present (especially if the property is being used as collateral). Such a policy may help stave off an aggressive landlord and provide you with much-needed time to adequately deal with the environmental contamination. Knowing that a Lender Liability Policy can facilitate a property transaction or refinance and assisting the landlord in understanding these facts may be the difference between continuing business operations and losing your lease, making the day you see engineers taking environmental samples a day like many others.

If you have any questions, please contact us.

As seen in Cleaner & Launderer.

Phase 1 Environmental Site Assessments, A Checked Box for Lenders or a Valuable Tool for Buyers?

PHASE 1 ENVIRONMENTAL SITE ASSESSMENTS (PHASE I ESAS) ARE MORE THAN A COMMODITY. LEARN THE TRUE VALUE OF A PHASE I.

BY: STEVE HENSHAW, PG, & CASEY MCFALL, CHMM   

Buyers and sellers of property are familiar with the need to have Phase I Environmental Site Assessments (Phase I ESAs) prepared when there is a transaction or a refinancing of a property.  To most stakeholders, including the buyer, seller, and lender, the Phase I ESA is part of the due diligence checklist, simply a report like a home inspection report, to identify potential environmental concerns with a property.

In the environmental consulting industry, Phase Is are considered “loss leaders,” meaning there is little to no profit to be made conducting the Phase I.  Either the consulting company believes they must offer the service because their competitors offer it, or they believe that a certain percentage of Phase Is will require follow up environmental work because of the likelihood of contamination turned up during the investigation. Because the profit margin on a Phase I is at best slim, it is not uncommon for consultants to use lower paid and generally less experienced staff to conduct much of the Phase I. One side note, there is no project that carries with it more risk for the consulting firm than a Phase I, because if contamination is not identified during the Phase I, but is found later in time, the consultant and its liability provider could be on the hook for damages.

For the lending officer, their goal is to get the loan approved by the internal lending committee so they can get the sales commission. There is stiff competition between banks, and the cost of a Phase I can make a difference in a sale or not.

These dynamics set the stage for the Phase I becoming a commodity in the marketplace, and little thought is given to the value of the Phase I and, conversely, to the risk of having a Phase I completed that does not adhere to ASTM Standard E1527.

So, what is the true value of a Phase I ESA? What is often misunderstood or unknown to Buyers and Lenders is the actual liability protection afforded to potential purchasers by correctly completing a Phase I ESA. This liability protection is known as achieving bona fide prospective purchaser (BFPP) status through the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). People acquiring property, even with known contamination, can obtain BFPP protection if “all-appropriate inquiry” (i.e., completing a Phase I ESA) is completed prior to purchasing the property. The purchaser also must meet continuing obligations regarding any known or suspected contamination, including taking reasonable steps to stop any continuing release, preventing a future release of hazardous substances, ensuring property occupants are not being exposed to contamination, and there is not a threat of exposure to off-property persons. Obtaining BFPP protection can prove financially invaluable to the property owner or tenant, potentially saving hundreds of thousands or even millions in cleanup cost responsibility. Property owners without BFPP protection that did not contribute to or cause contamination at a property can still be held liable for cleanup costs by state and/or federal environmental regulators.

The Phase I ESA is a complex document that must be completed in its entirety to afford the prospective purchaser BFPP. Minor details that are often missed in Phase Is can result in a court rejecting a BFPP claim for a property owner. These minor details include but are not limited to not listing the exact purchasing entity as having reliance on the report, the prospective purchaser not completing the required questionnaire, and having an expired Phase I at the time of closing. This last point is especially important as we hear many parties state that they don’t need a Phase I ESA, as there was one previously completed for the property. The truth is that environmental standards change, and what may have been acceptable several years ago may constitute an environmental concern under today’s environmental regulations. Unless the exact prospective purchasing entity is listed as having reliance in the Phase I ESA and the report is under 180 days old, the Phase I is likely not valid for BFPP purposes. Additionally, it should be noted that the 180-day window for Phase I ESAs is from the date the first record is reviewed by the report preparer, not the date the report was issued.

Baseball great Leo Durocher once said that baseball is a game that many attend, but few understand. This can absolutely be applied to the world of environmental due diligence and Phase I ESAs. There are many environmental companies who claim to complete Phase I ESAs, but their product often will not afford the purchaser BFPP, even if it was completed prior to the property purchase. It’s the nuances that make the difference in the world of environmental due diligence. If you have questions or a need for environmental due diligence of Phase I ESA services, EnviroForensics would be happy to discuss your situation and, if appropriate, prepare a complete Phase I ESA that will provide liability protection and peace of mind for you and your business.

Disclaimer: Some states do not accept BFPP status as absolute liability protection.  We are not lawyers and cannot give legal advice; as such, all Buyers should consult with qualified legal counsel when buying property.

Contact us with your questions about real estate due diligence.

As seen in Cleaner & Launderer


Steve Henshaw, PG, CEO

With 30+ years of experience, Stephen Henshaw holds professional registrations in numerous states. As Officer of EnviroForensics, Henshaw serves as a client manager and technical manager on complex projects involving contaminated and derelict properties, creative litigation, deceased land owners, tax liens, non-performing bank notes, resurrecting defunct companies, and cost recovery. Henshaw’s expertise includes a comprehensive understanding of past and current industry and waste handling practices and the fate and transport of chlorinated solvents in soil and groundwater. He has served as a testifying expert for plaintiffs and defendants on high-profile cases involving causation and timing of releases, contaminant dispersion, allocation, damages, past costs, and closure estimates. He has a strong knowledge of state and federal regulations, insurance law, RCRA, and CERCLA. He has managed several hundred projects, including landfills, solvent and petroleum refineries, foundries, metal plating shops, food processors, dry cleaners, wood treating facilities, chemical distribution facilities, aerospace manufacturing facilities, and transporters and provides strategy instrumental in funding projects and moving them to closure.

Casey McFall, CHMM, Director of Real Estate Due Diligence

Casey McFall is the Director of Commercial Real Estate Services and a Certified Hazardous Materials Manager with 15+ years of experience as an environmental consultant. He has managed numerous petroleum and chlorinated solvent projects throughout various stages of investigation, remediation, and closure. His professional experience includes all areas of project management, due diligence, reporting, and regulatory negotiation. He has experience managing projects in Alaska, California, Georgia, Indiana, Kentucky, Ohio, South Carolina, Wisconsin, and Washington. Casey also has experience acting as an environmental liaison for municipalities, offering expert advice regarding environmental issues and providing risk communication to stakeholders and the community by explaining complex environmental issues in a concise, understandable way.

How to convert a former drycleaning property into a commercial rental space

SIX STEPS THAT SHOULD BE TAKEN BEFORE CONVERTING A FORMER DRYCLEANING PROPERTY INTO A RENTAL PROPERTY 

BY: MORGAN SALTSGIVER 

Across the country, a wave of small and independent drycleaning business owners are shutting their doors to retire or start new careers in response to a volatile economic landscape. Some rented their properties and are now leaving property owners and real estate investors scrambling to fill those vacancies and protect their investments. The fact that drycleaning properties have a history of environmental contamination paired with the quickly dwindling demand for drycleaning services means these properties will likely need to be retrofitted for use by a non-drycleaning business.  

Preparing your commercial property for a life after drycleaning is a complex process. There are physical updates that need to be made, potential environmental liabilities that need to be assessed, and legal obligations that need to be upheld. But it is all worth it to ensure that the property remains active, and cash continues to flow into your pocket. Here are the six steps you should do as a commercial property owner before leasing your former drycleaning property to a non-drycleaning tenant.

STEP ONE: DECOMMISSION THE DRYCLEANING EQUIPMENT 
Decommissioning drycleaning equipment is something the drycleaner is obligated to take care of, so we won’t go too far into the details. However, there are a few things that a property owner can do to help facilitate and make this a smooth and mutually beneficial procedure.  

  1. Help the drycleaner plan the route their equipment will take to the outside of the building, and make sure the equipment can fit through doors or openings 
  2. If it can’t fit, arrange for windows to be removed in order to move the equipment outside 
  3. Coordinate a moving schedule with the drycleaner, and rope off parking spots for the drycleaner to stage their equipment as it comes out of the building 
  4. Make sure all solvent, waste, carbon and filtration have been removed from the drycleaning machine before it’s transported 
  5. Make sure refrigerant has been evacuated from the chillers 
  6. If the drycleaners’ boilers have mercury switches, make sure they’ve been removed and properly disposed of 
  7. Make sure that all remaining chemicals are safely disposed of by consulting with your Material Safety Data Sheets (MSDS) or an environmental consulting firm  

As the landlord, you will have the ultimate say on the moving schedule and the precise conditions the property should be in when the tenant hands over the keys. Be sure to communicate these parameters in your lease agreements, so everyone is on the same page, and you can avoid any legal ramifications.    

Read this blog post to plan your drycleaner decommissioning 

STEP TWO: ADDRESS ANY STRUCTURAL CONCERNS THAT COULD CAUSE INDOOR AIR QUALITY CONCERNS
Making sure the air inside the building is safe to breathe is the single most important step in this process. Former drycleaning plants almost always test higher in Perc concentration than the extremely low vapor intrusion screening level that non-drycleaning businesses like retail clothing stores or ice cream shops must abide by. While vapor intrusion is a common cause of this spike, it is possible that other conditions are at play.  

Certain building materials can off-gas Perc vapors and cause high concentration levels during air sampling. The most common example of this is the concrete floor and walls around the area where the drycleaning machine was housed. Over the years, the concrete becomes saturated with Perc, and even if it doesn’t make it to the subsurface, it can still release vapors for a very long time. Other building materials can also cause indoor air problems. Drywall, insulation, and ceiling tiles are all porous materials that can trap Perc vapors during active operations and slowly release them over time. It is for these reasons that you should remove any drywall, insulation, and drop-ceiling tiles that were present during drycleaning operations, and seal floors and walls with a vapor barrier product designed to stop off-gassing before a new tenant moves in. 

Another common structural problem that leads to higher Perc concentrations are the floor drains. If separator water, floor wash water, or small spills of Perc were ever routed to the sanitary sewer floor drains, the vapors can return over time. Most floor drains are equipped with P-traps that are designed to create a vapor seal using the water that is poured into them. However, if these drains don’t get used and the water inside the P-traps dries up, vapors can seep back into the room. It’s recommended that these drains are used frequently to keep the water seal intact. Other options include installing one-way vapor lock valves for the drains or sealing them up altogether. 

STEP THREE: EVALUATE THE POTENTIAL THAT A RELEASE COULD HAVE OCCURRED
After the drycleaning equipment is moved out, and all structural issues that may cause indoor air quality concerns are addressed, it’s time to figure out if there are any larger underlying environmental problems. This can be kickstarted through a Phase I Environmental Site Assessment (ESA). During a Phase I, a consultant will review the history of a property to determine past use and regulatory records for the site and surrounding properties, conduct a site walk, and interview site contacts and local agencies to decide whether there are any outstanding liabilities on the property. A Phase I ESA done through ASTM standards also satisfies what is known as the Bona Fide Purchaser Protection (BFPP) which provides some legal protection from environmental liability to a future property owner or future tenant. 

STEP FOUR: CONDUCT INSURANCE ARCHEOLOGY
Sometimes a more thorough investigation of an underlying environmental problem is called for, and when that happens, we recommend starting the insurance archeology process as quickly as possible to see if you’re covered. Environmental investigation and remediation services–especially at properties that have a history of Perc use–can be pricey, and even one found policy can potentially offset a significant amount of the cost.  

See what kind of environmental services historical CGL policies can help pay for 

Even if you can’t find the actual policy, a trained insurance archeologist can use evidence like an old receipt, canceled check, or piece of mail to prove that coverage existed at one time or another. Another piece of good news for landlords is they can use the old tenant’s insurance coverage as well as their own. Every previous drycleaning operation is considered a Potentially Responsible Party (PRP) to the contamination and therefore is legally obligated to pay for part of the cleanup. The sooner you get in touch with an insurance archeologist like the ones at PolicyFind, the sooner you can start compiling evidence of coverage, searching for other PRPs to share in the cost, and tender claims to insurance to pay for the necessary environmental services. 

STEP FIVE: PERFORM STEPS NECESSARY TO SATISFY CONTINUING OBLIGATIONS
In order to continue to benefit from the BFPP liability protection that a Phase I ESA provides, a property owner has a continuing obligation to manage any pre-existing contamination and protect tenants and occupants from exposure to a release. These requirements include: 

  1. Compliance with land use restrictions; 
  2. Taking reasonable steps to manage releases; 
  3. Providing full cooperation/access/assistance to regulators overseeing the property; 
  4. Compliance with information requests and administrative subpoenas; 
  5. Not impeding performance of response actions; 
  6. Not causing or contributing to contamination. 

Although there is a lot of maintenance involved in this step, it will work to your advantage as the property owner to have that legal protection and be able to promote a safe property to future tenants.  

STEP SIX: COMMUNICATE RESULTS OF EVALUATION AND CONTINUING OBLIGATION REQUIREMENTS WITH FUTURE TENANTS
The BFPP liability protection is extended to tenants through the BUILD Act of 2018, so keeping up on those continuing obligations can and should be a team effort. Be open and transparent with future tenants and make sure there are parameters regarding those continuing obligations written out in the leasing agreement. We’ve seen some very messy tenant/owner lawsuits when there is no BFPP protection and no defined liability in the terms of the lease. And, if a tenant is not aware of this existing protection, and they mess up the continuing obligations by causing or contributing to a release, or exacerbating an existing release, legal battles could ensue.  

Preparing your property for a life after the drycleaning operation is a long and sometimes tedious one, but it will be worth the effort to make sure the property can operate safely and stand up to regulatory scrutiny. With the drycleaning community shrinking year by year, it will make a huge difference in your property management portfolio if the property can operate as something other than a drycleaner. 

Contact us today to learn how we can help you assess and manage environmental liabilities on all of your commercial properties. 
 


Morgan Saltsgiver Morgan Saltsgiver is a Licensed Professional Geologist (LPG, PG) with sixteen years of experience in the environmental industry specializing in providing Agribusiness, Brownfields development, and traditional environmental consulting services to her clients. Her educational background in geology provides a strong basis for geological and hydrogeological interpretations of contaminant migration through subsurface media and the development of conceptual site models used to develop the path forward towards closure for each project site. She assists her clients with finding and using alternative funding sources for their environmental issues, including historical insurance policies, federal and local Brownfields grants, and state trust funds. 

What you need to know when buying or selling a drycleaner

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

For sale sign outside of potentially contaminated drycleaner property

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  

Why Phase I Environmental Site Assessments are Important for Buying or Selling a Drycleaner

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

Drycleaner in a strip mall with a for sale sign

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.

Phase I Environmental Assessment process in five steps
The Phase I ESA process in 5 steps: 1. Review client questionnaire; 2. Review history to determine past use and regulatory records for site and surrounding properties; 3. Site walk and reconnaissance; 4. Interviews with site contacts and local agencies; 5. Submit report to client. Learn more about the Phase I ESA 5 step process.

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”

 



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 you need to know about Phase I/II Environmental Site Assessment (ESAs)

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

Environmental consultant wearing yellow safety vest writing notes on a clipboard during a Phase I Environmental Site Assessment

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.

Phase I Environmental Assessment process in five steps

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

Advancing ASTM Standards + Pro Tips for Real Estate Transactions

ROGER COHEN, DUE DILIGENCE MANAGER AT ENVIROFORENSICS, IS AN EXPERT IN REAL ESTATE DUE DILIGENCE AND IS ON THE COMMITTEE WORKING TO CREATE THE NEXT ASTM STANDARD PRACTICE FOR ENVIRONMENTAL SITE ASSESSMENTS: PHASE I ENVIRONMENTAL SITE ASSESSMENT PROCESS (E1527). LEARN MORE ABOUT THE NEW ASTM STANDARD AND GET ROGER’S TIPS FOR CONDUCTING REAL ESTATE DUE DILIGENCE AND TRANSACTIONS.

Environmental consultants in safety vests conducting real estate due diligence with clipboard

BY: ROGER COHEN

Real estate due diligence is a formal process that assesses real estate for the potential risk of environmental contamination. Due diligence is conducted to understand the environmental conditions and prior uses of the property in order to reduce environmental liability and risk. Understanding these conditions allows a buyer to evaluate potential limitation, liabilities, and risk associated with the property and reduces environmental liabilities under CERCLA. Standards for conducting due diligence are set forth by the Environmental Protection Agency (EPA). The standards and practices described in the ASTM E1527 Standard are designed to constitute all appropriate inquiries as defined in 42 U.S.C §9601(35)(B)

WHAT IS THE ASTM?
ASTM is the abbreviation for American Society for Testing and Materials and is an international standards organization that develops and publishes voluntary consensus technical standards for materials, products, systems, and services across a variety of business sectors. ASTM has technical committees dedicated to environmental standards, and they have published hundreds of standards to promote environmental safety in areas ranging from improved environmental assessment processes to enhanced waste management and recycling programs.

ASTM due diligence standards are important because they provide consultants and regulatory agencies agreed-upon terms and best practices. For real estate transactions, ASTM E1527 defines the procedures required to perform a Phase I Environmental Site Assessment (ESA) that satisfies all appropriate inquiries under the Brownfields Amendments, allowing users of the report to qualify for limitations on the CERCLA liability.

WHAT WILL THE NEW E50.02 ASTM STANDARDS INCLUDE?
ASTM revises and updates technical standards to ensure the latest research and regulatory requirements are integrated into the standard technical practices and processes.

Roger Cohen, EnviroForensics Real Estate Due Diligence Manager, recently joined ASTM’s subcommittee E50.02 focused on Environmental Assessment, Risk Management, and Corrective Action. The first task he supported was the latest update and revision of ASTM E1527 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process. The standards are updated and revised every eight years with the new technical standard coming out in 2021. The updated standards are submitted to them and then approved so environmental consultants can follow the latest guidelines put forth by experts in the industry.

These new technical standards will include language around Per- and Polyfluoroalkyl Substances (PFAS) and other emerging contaminants, which is new compared to the previous version, however, it doesn’t necessarily change how they will be handled. For example, PFAS are not widely regulated in the United States right now, and for a potential contamination to be considered a recognized environmental condition (REC), it must be regulated either by the EPA or the State government. Therefore, depending on the state, PFAS may not be considered a REC. As technical understandings advance, the revised ASTM technical standards will help reduce current ambiguity around emerging contaminants as RECs for environmental consultants.

PRO TIPS FROM OUR REAL ESTATE DUE DILIGENCE MANAGER
1. What things do people need to know before they do a Phase I ESA?
The environmental investigation is a key part of commercial/industrial property transfer. Buyers should incorporate budget and time into their preparations to perform the Phase I ESA and, if necessary, further investigation on a property, to ensure they have protections against environmental liability in place prior to a transfer of the property deed. Environmental issues can be frustrating for a buyer, adding additional costs or slowing down the property transfer and future redevelopment of a Site. But the process is there to protect the buyer. Environmental issues are high-liability, with environmental investigation and remediation expenses frequently costing more than a million dollars. While the environmental investigation costs are often minimal in comparison to the amounts involved in a property transfer, it is essential that the due diligence be performed thoroughly and that, if necessary, additional legal protections obtained. The Environmental Professional should be able to assist in the process and work with the buyer’s lender(s), attorney(s), and state and federal regulatory agencies to help facilitate the property transfer while ensuring buyer protections are in place.

Read our blog to learn more about Phase I and Phase II ESA.

2. What steps should someone take before starting a Phase I ESA?
It is important that a buyer have an Environmental Professional that they trust who will help them through the due diligence process. Plan enough time to ensure due diligence is performed prior to obtaining the deed for a property. Your Environmental Professional should be able to provide you with additional information regarding the property based on a general review of the property’s history and the history of land use in the general vicinity of the Site.

3. How long is a Phase I ESA good for?
In order to receive environmental liability protections, the interviews, database reviews, lien search, visual inspection of the property, and the declaration by the environmental professional all have be have been conducted within 180 days of the date of purchase. The Phase I ESA Report is good for 1 year; however, if any of the above sections are over 180 days old then the user will not be granted the liability protections afforded by the due diligence process.

4. When in the real estate transaction process should a buyer conduct a Phase I ESA?
A buy should ensure they have a valid Phase I ESA prior to the deed transfer of the property.

5. Do you have any advice or next steps for people considering a Phase I ESA?
Buyers should understand that a Phase I ESA is a comprehensive process, with reports incorporating large quantities of data. It takes time to accumulate and process the data, and there can be delays related to access to the Site or responses from government agencies that are queried as part of the interview process. COVID-19 has also caused delays and additional considerations, as access has been limited to many businesses and the response time for records requests has increased. I recommend that potential purchasers of commercial/industrial properties plan for the Phase I ESA as part of the buying process. Talk with your environmental professional up front regarding the property. They should be able to provide you general expectations based on the site’s current use and the usage and history of the surrounding area.

6. What should a buyer be on the lookout for?
Buyers should be aware that certain types of properties are at much greater risk of causing environmental impacts, such as gasoline stations, dry cleaners, and industrial facilities. Ask your environmental professional at the beginning of the process if they have any concerns and understand the risk tolerance of your financial institution.

7. What should a buyer do if a Phase I ESA turns up RECs?
Take a deep breath and do not panic. The point of the Phase I ESA is to identify potential petroleum and/or hazardous chemical impacts to avoid future liability for a buyer. Talk with your environmental professional, your lawyer, and your financial institution to determine what next steps need to be taken in order to ensure your liability protections are in place and to determine if the potential impacts will have an impact on the buyer’s proposed use of the property. Sometimes nothing needs to be done, sometimes a subsurface investigation needs to be performed, and sometimes you need to get creative to find solutions to satisfy your lender and possibly regulatory agencies. Your environmental professional can help you to understand the risk involved and provide you with next steps if needed.

Learn more about our real estate due diligence services

 


headshot of Roger CohenRoger Cohen, LPG, Manager of Real Estate Due Diligence
Roger Cohen has 10+ years of environmental consulting experience specializing in environmental and real estate due diligence, site investigation, and remediation. Roger has worked on varying projects including performing investigation and remediation of sites impacted with petroleum and chlorinated contaminants, metals, and pesticides and herbicides to industrial hygiene impacts such as asbestos, lead-based paint, and mold. He has facilitated regulatory closure and redevelopment of Sites across Indiana through the IDEM VRP, State Cleanup, LUST, RCRA, CERCLA and Brownfields programs.

Roger works with banks, real estate developers, and local and state government officials to evaluate environmental risk, determine pathways to redevelopment, and assist in finding alternative funding sources such as historical insurance policies, tax credits, federal and local Brownfield grants, and state trust funds.

How to protect yourself from other people’s perc contamination

LEARN HOW TO SHIELD YOURSELF FROM HISTORICAL LIABILITIES 

Mess of paints similar to the mess of perc contamination left behind by previous drycleaner operators

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


Headshot of Jeff CarnahanJeff 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.