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. 

MOST DRY CLEANERS HAVE HEARD THE DREADED PHRASE FROM THEIR COLLEAGUES, “THEY DID A PHASE I.” FROM THIS POINT ON, DRY CLEANERS ARE LEFT WAITING ON PINS AND NEEDLES TO HEAR WHEN THE RESULTS WILL BE READY. IN THIS ARTICLE, I’LL EXPLAIN WHAT YOU CAN EXPECT DURING A PHASE I AND A PHASE II ENVIRONMENTAL SITE ASSESSMENT.

BY: STEVE HENSHAW

WHAT IS A PHASE I ENVIRONMENTAL SITE ASSESSMENT?
A Phase I Environmental Site Assessment (ESA) or Phase I ESA, is short for a study conducted on a property to evaluate the likelihood of environmental contamination. There is a standard that must be followed under the American Standard for Testing and Materials (ASTM) to satisfy an All-Appropriate Inquiry (AAI), which is the process of evaluating a property’s environmental condition and assessing potential liabilities for any contamination. This is also under Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).

The thing about conducting a Phase I ESA on real estate that has a dry cleaner is that invariably, because of the history of dry cleaning operations, a Phase II ESA is nearly always required as follow-up. In other words, one can be certain that if a property has an active or historical dry cleaner on the site is being considered for refinancing or purchasing, follow-up soil, soil gas or groundwater samples will likely be required.

Download a questionnaire to begin collecting helpful information about your dry cleaning property.

WHAT IS A PHASE II ENVIRONMENTAL SITE ASSESSMENT?
This is a follow-up sampling called a Phase II ESA. While this common terminology is not accurate, it does convey a step further in the process of determining whether a dry cleaner has affected a piece of property. The Phase II ESA, also referred to as a “subsurface investigation” or more commonly “site investigation,” typically consists of collecting a series of soil, soil gas, which includes sampling for vapor intrusion, and groundwater samples and sending the samples to a laboratory to determine if dry cleaning operations have impacted the property negatively through environmental contamination.

Phase II ESAs initial soil and groundwater samples are collected at a few locations where the highest likelihood of releases has likely occurred. These samples can be collected by hand using hand-held equipment, or by small to large drilling rigs. The type of equipment used depends on the types of soil and depth of groundwater at the site, and whether the samples are collected from underneath the building or outside. These areas are typically current and former dry cleaning machine locations and/or dry cleaner solvent transfer locations. Once collected, the samples are then sent to a laboratory to determine how much, if any, dry cleaner solvents are present in the soil and groundwater. If impacts are present, additional soil and groundwater samples are collected at more locations until the entire area of soil and groundwater contamination has been determined. This process may take several months. Once the extent of soil and groundwater contamination has been determined with Phase II ESA activities, remediation activities can begin.

HOW MUCH DO PHASE I ESAS AND PHASE II ESAS COST?
While a Phase I ESA costs are generally low and predictable, Phase II ESA costs vary by many factors. Some of these factors are “site specific.” For example, the types of soil and depth to groundwater at the site, the length of dry cleaner operations, and even prior operations will influence the cost of a Phase II ESA. Other factors include the reason for conducting a Phase II ESA. For example, if the dry cleaner is thinking about refinancing, the Phase II ESA may consist of the fairly simple question, “Is my site affecting the environment?” If the desire is to know the costs to reach site closure, the cost of a Phase II will be higher than the first question.

The biggest cost factor associated with a Phase II ESA relates to the experience of the consultant chosen and their attention to the needs for the Phase II. One of the first needs is to consult with the dry cleaner on what the goals are, what the needs could be, and the costs associated with the range of possibilities for an initial Phase II ESA. The dry cleaner needs to understand what will be completed and for what cost, what the potential downsides are, and what makes the most sense for their situation. In order to do that well, your consultant needs to have experience with your business, business and technical savvy to understand the situation, and finally, the sense to know if there are other sources of funding that can eliminate or, at least, ease the cost burden.

Phase I ESA costs generally range from $1,000 to $2,500 while Phase II ESA costs vary as summarized above. Typically, a Phase II ESA can cost anywhere from $5,000 to well over $100,000. Phase II ESA initial sampling activities (to determine if there is a problem) usually cost around $5,000.

The success of the experience is tied to communication of needs and matching effort to the needs. The most important variable under the control of the owner is to pick a qualified, responsive consultant.

No matter your situation, we’re ready to find the best solution for you. Request a quote today.

As seen in Cleaner and Launderer

Stephen Henshaw, Founder at EnviroForensics & PolicyFind  has over 30+ years of experience and holds professional registrations in numerous states. Henshaw serves as a client manager and technical manager on complex projects involving contaminated and derelict properties, creative litigation, deceased landowners, tax liens, non-performing banknotes, 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.

How the value of your dry cleaning business can be affected after contamination is found.

Written by Jeff Carnahan, LPG, President, EnviroForensics
As seen in the April 2019 issue of Cleaner & Launderer

At the threat of mixing metaphors right out of the gate, I’d like to start this article by referencing a fable we all know; that of the ant and the grasshopper. While the care-free grasshopper chirped away and enjoyed times of plenty, the industrious and hard-working ant busily labored to store food for winter. When readily available food became scarce as winter fell, the grasshopper starved but the clever ants remained well-fed from their stockpiles. I have had the pleasure of meeting and working alongside many dry cleaners throughout my career, and their work ethic and wisdom have consistently impressed me. Without fail, I’ve heard it told by them that the hard work they’ve put into their business is intended to help build-up winter stores for lean times, their retirement, or to pass on to their children. A lot of people refer to this as building a nest egg. Regardless of what you call it, the monetary value of the hard work, blood, sweat, and tears that you’ve invested in your business is held in the potential sales price of your business assets and potentially, your property.

The Good Old Days are Over

During all the years of doing business, the fact that your future nest egg could be potentially devalued by an environmental contamination problem was probably not part of the equation. Decades ago, it didn’t need to be. Back then, when businesses and properties were bought and sold, it wasn’t standard practice to even consider the environmental condition of the land. As such, the value of the sale wasn’t affected. The business owner could cash-in for a fair price and go on to enjoy their retirement.

Today, however, nearly every commercial property and business acquisition involves a real estate and environmental due diligence process intended to specifically and thoroughly find out whether environmental contamination has occurred. The days of expecting someone to buy your business without determining if they would be buying environmental liability, or your property without finding out if its value has been impacted by contamination, are gone.

Don’t let environmental contamination crack your nest egg. Download our questionnaire to review your real estate due diligence situation.

Let’s talk for a minute about the environmental assessment process during sales transactions, and then we can go over a couple of things that you can do to help yourself out and minimize the damage to your nest egg when the time to retire comes. For those who may be in the mode of buying business and properties, this may come in helpful for you as well.

What Happened?

A short discussion about the environmental due diligence process was presented in my February article, How Clean is Clean Enough? Regulatory Closure vs. Environmental Cleanup, but I’ll breakdown the process step-by-step. Back in the late 70s and 80s, a series of laws were passed by Congress that put into place two major facts:

1. Certain chemicals were determined to be hazardous and had to be managed in specific ways; and
2. As a generator of wastes containing these certain hazardous chemicals, businesses or individuals would forever carry any associated liabilities resulting from these chemicals.

The laws were comprised primarily of the Resource Conservation and Recovery Act (RCRA) and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Some of you may remember these days because suddenly you had to manage your solvent waste differently and you had to ramp-up your record keeping.

It may have even seemed unfair that the federal and state governments were going to be holding you responsible for what contamination may have happened as a result of your business, or on your property, regardless of if you had anything to do with it. The fact was, and is, that RCRA and CERCLA ended up causing a standard of practice in the property and business transaction world that was intended to avoid those environmental liabilities from being transferred along with what was being sold.

How it Works These Days

When a business entity buys a property, if a series of environmental inquiries aren’t performed properly, they could accidentally be held responsible for contamination in accordance with CERCLA. If the inquiries are performed correctly, the buyer may qualify for an exemption from those CERCLA liabilities. The first inquiry that is needed is called a Phase I Environmental Site Assessment (ESA). The Phase I ESA needs to be performed by a qualified Environmental Professional (EP), like an environmental consultant. Your consultant will follow a specific set of due diligence standards to look at environmental records and databases to determine what the sale property has been used for in the past, and what has gone on at surrounding properties to see if those activities could potentially have impacted the sale property. They will also come to do a site visit to walk around the property and buildings to see if any present operations may be potentially causing a problem. They’ll also need to do an interview to ask some standard questions about knowledge of environmental issues, etc. If they do find something during this process, they may have to put in their report that a Recognized Environmental Condition (REC) has been identified. If a REC is identified during the Phase I ESA process, then there need to be samples of soil, groundwater and/or vapor collected from the sale property to determine if an actual environmental release has occurred.

The subsurface investigation process is called the Phase II ESA. If an environmental release is identified at the property, there will be additional investigations to gather more data. There needs to be more data to gain insight into the potential cost of cleanup so that the buyer and seller of the property can start talking about how the price is impacted, or even if the buyer wants to still buy the property. The cost estimating process will also need to take into consideration that the cleanup would be performed in a state agency program so that a regulatory closure can be received afterward.

The Challenge for Dry Cleaners

Here is the tricky part; due to the prevalence of environmental issues related to use of perchloroethene (PCE, Perc) in the dry cleaning industry, just the fact that a dry cleaner exists, or used to exist, at or adjacent to the sale property, is enough to trigger a Phase II ESA per the due diligence standards. At this point in the property transfer process, if you want to continue with the sale, there will definitely need to be sampling. The process can be stopped right after the Phase I ESA without any liability to the property owner, but that won’t get the property sold. This is a very uncomfortable spot to be in, I’m sure. Many of you know this for a fact.

Putting the property sale process aside for a minute, when a business is being sold, a similar due diligence process is undertaken by the potential buyer. They will want to make sure that the business they are acquiring doesn’t have a current or hidden environmental liability that could hit the new owners at some point in the future and affect the value of their investment. Businesses are usually sold either as asset-only acquisitions, or stock plus assets acquisitions. The CERCLA liability that we are talking about is tied to the stock of the company and its owners. Because of this, many times business buyers will want to purchase just the assets (equipment, customers, brand, goodwill, etc.) of the company, and not acquire the property or stock. That allows the buyer to skim the cream off the top of the business, and leave the junk at the bottom, like the environmental liability, for you. This is a way, however, of getting the job done and keeping a good bit of value for your nest egg.

Preserving Your Nest Egg

Let’s talk about a couple of ways that you can preserve the integrity of that nest egg in preparation for the time when you are ready to cash-in and move on.

Read how a prominent second generation dry cleaner proactively prepared their exit strategy

First, there are a variety of insurance products available that you can purchase as protection against environmental liability. The insurance industry started specifically excluding coverage for environmental pollution from their general liability policies back in the mid-80’s, right around the time that the CERCLA responsibilities were being formed. However, environmental pollution liability can still be insured today as specific policies or riders if it needs to be a part of your calculation. If you think that these may be of interest to you, I encourage you to reach out to your agent or a representative for a carrier that is involved in the dry cleaning industry. An insurance company with a long history and knowledge of dry cleaners would probably be best.

Another way to help preserve your nest egg against devaluation from contamination issues is, of course, those old general liability policies from before the mid-80s, when there weren’t specific exclusions. From my experience, this is usually the time period when environmental releases actually occurred anyway. Find them and assess their value. Even if there are no known environmental releases associated with your dry cleaning business, having these old policies in hand may be what is needed to convince a potential business or property buyer that they won’t be stepping into a problem that can’t be paid for if they close the deal with you. Those old policies are an asset to your business, so they should be part of your nest egg calculation.

Contact us so we can help you protect your nest egg.

As seen in Cleaner & Launderer

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 focused on being a partner with the dry cleaning industry for the past decade, and he’s a frequent contributor to the national dry cleaning 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.