Impact Study: The Joining of Economic and Environmental Interests Calls for Preparation, Investigation and Communication - At All Stages of the Process

by Jessica J.O. King

When selling or purchasing property for development, an informed decision-making process controls costs and liabilities for the parties, while preserving our state’s unique natural resources for future generations.

For the investor or developer, the key to a successful merger of economic and environmental interests is to perform proper due diligence before and after the closing. The most important step is putting into place a knowledgeable and experienced team.

Pre-purchase due diligence

Having the right people armed with accurate information assures the parties to the sale and the people of South Carolina that there are no unfavorable surprises and if there are, that they are dealt with properly. If you are a party to a sale of real property, be sure to have these key professionals on your team.

Attorney

Select a lawyer who understands your needs and goals and can help you through all stages of this process, including assessment, clean-up, permitting, decision-making, and contract negotiations. Your legal counsel can help you choose the right engineering professional to inform all of your decisions.

Engineering Professional

The engineer’s job is to review all previously generated environmental reports; conduct additional environmental assessments and/or update existing ones to define all current and recognized environmental concerns; and, based on the assessments, offer prudent recommendations on whether further steps need to be taken.

Hiring this qualified engineering professional is a “must do” for three reasons:

First, if the engineering consultant who conducts the assessment is not deemed “qualified,” the purchaser can be held liable for contamination that existed on the site prior to the purchase, even though the purchaser had nothing to do with it.

Second, that engineer will understand a client’s needs and how his or her findings may affect the deal. The consultant will understand the liability issues surrounding the inquiry process and will implement the process efficiently.

Finally, the purchaser needs to define all recognized environmental concerns so that these costs and liabilities are taken into consideration – before the deal is finalized.

Addressing Recognized Environmental Concerns (RECs)

Once the initial environmental assessment is complete and the results are in, there are important decisions to make. Among them, is an additional assessment necessary to better define the issues? If so, how much will it cost and who should pay? If concerns are identified, what remediation, if any, will be necessary and how much will that cost? What is the regulator’s role in the process?

The regulators that may become involved during the deal may include staff of the many divisions of South Carolina Department of Health and Environmental Control (SC DHEC), the South Carolina Department of Natural Resources or a federal agency, such as the Army Corps of Engineers (for wetlands issues) or the Environmental Protection Agency.

There are many questions to answer, risks to be considered and a complex code of laws to navigate. Consultants and attorneys who specialize in environmental law can make a valuable difference in ensuring the deal goes through on time, with liabilities defined and costs favorably allocated.

Managing environmental risks

The most important reason for wanting information early in the process is to allow the parties to assign environmental liabilities and costs. An attorney can identify the pros and cons of the following options:

Purchase price adjustment
Indemnifications for existing contamination, prospective releases, third party claims, or remediation
Escrows
Carve out parcels
Warranties
Brownfields contracts with SC DHEC
Environmental insurance

Post-closure Issues

Even after a successful closing, there may be permitting and other regulatory matters that will need attention. Specifically, the buyer may need a permit or other special considerations before beginning renovations, construction or operations. These considerations might include:

Wetland issues and permitting requirements
Asbestos surveys and notifications
Construction and operating permits for air emissions sources
Land disturbing and storm water permits

If these or other issues apply to the purchaser, how can he or she streamline the process and save money? There are ways that a seasoned attorney or an environmental consultant can help. As with all contractual matters, the earlier that issues are identified and solutions are discussed, the better off all parties will be.

Case Study

Issue: A prospective purchaser wished to acquire and commercially develop a large parcel of land that included numerous tracts. The tracts had historically been operated as gas stations and other commercial uses. The purchaser planned to develop the property into a large retail shopping center with multiple high-profile tenants. During the due diligence period, the purchaser had a Phase I conducted by a qualified environmental professional. The Phase I revealed a number of Recognized Environmental Concerns (RECs) including:

REC 1: an area on the property where there had been a petroleum related release almost 10 years earlier and where there had been former Underground Storage Tanks (USTs) previously removed from the site;
REC 2: the presence of three existing USTs on the property that needed to be properly removed and tested to confirm no releases; and,
REC 3: various drums of chemicals and other potentially hazardous wastes that needed to be properly removed and disposed of and discolored soils around the former gas station.

Impact: Based on the Phase I results, the purchaser did the right thing and called our firm’s commercial transaction attorney and myself to deal with the environmental issues. Together, we helped protect the client from the identified issues as follows:

REC 1: We researched the area where a UST release had previously been reported to DHEC and immediately got in contact with the DHEC project manager to discuss the release’s impacts. We were able to confirm in writing from DHEC that No Further Action would be required by the purchaser to address the impacted area because the source had been determined to be a neighboring property and the release was already being addressed properly by the responsible party.
REC 2: Purchaser paid to have the tanks properly removed prior to closing and have tests performed and submitted to DHEC to determine of the tanks had leaked. The UST closure report confirmed that there had been a minimal release on the property associated with the USTs and DHEC determined that further testing would be required at that time. The lawyer’s quickly dealt with this issue so that the deal could go through in a timely manner without further delay. We did this by drafting an escrow agreement whereby closing funds would be set aside by the seller to cover any deductible required by DHEC to address any potential contamination in this area of the property. We further negotiated to have our client fund and conduct the first round of sampling requested by DHEC to ensure it was done in a timely and efficient manner. When the first round of tests confirmed that there had been no impact to the groundwater from the limited release, we were able to speed up a No Further Action letter (NFA) from DHEC to close the file on this release and give that portion of the properly a clean bill of health. Upon DHEC’s issuance of the NFA, we returned to the seller the escrowed funds that were held by us and that would no longer be needed for remediation.
REC 3: The purchasers and myself had a Phase II done by the qualified environmental professional to ensure that all the hazardous materials were properly removed and all potentially impacted soils were tested prior to closing. This was done and the Phase II report confirmed if and what soils would need to be disposed of prior to closing and that there was no long term groundwater issues that the purchaser would need to deal with post-closing.

Results: Finally, after making sure that our client, the purchaser, was not assuming ANY environmental liabilities associated with the existing releases on-site, we assisted our client in negotiating leases with nationally known large retail companies that wished to locate on the property after our client developed it. This negotiation required extensive drafting of environmental language to ensure the tenants that the contamination from the neighboring property would not impact their operations or sales and that all other issues had been properly assessed and dealt with prior to purchase.

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