September 30, 1991 - From the September, 1991 issue

Developers and Environmental Laws: Caveat Emptor

Purchasing commercial real estate in California is complicated by environmental health laws like the California Environmental Quality Act. President of Environmental Financial Services, Inc. (an environmental consulting firm in Encino), Bart Sokolow gives commercial real estate developers a guide to ensuring their properties meet environmental standards.

In today’s tough economic times, we’ve all fancied ourselves as ready to make a killing in the real estate market, negotiating to buy property at bargain basement prices. The pur­chase price, however, may be your cheapest expense. Today, buying commercial real estate could become an environmental minefield. 

Any contamination to the air, soil or water passing on over, through or under your property is now yours. The task of cleaning it up is now clicking on your meter. Therefore, the more you know about the parcel before you buy it, the better off you will be. 

If you are in any way involved with the purchase of property, you need to understand environmental liability. You need to know the nature of the environmental liability you face, the types of information that will al­low you to limit your liability before making a potential parcel purchase, how to collect vital information before making a purchase and what safe­guards are available. 

Nature of Environmental Laws 

Environmental laws are broadly classified under state, federal and municipal codes to protect the public’s health and safety. In light of these regulations, the admonishment of caveat emptor — let the buyer beware — could not be more appropriate for real estate transactions. 

Environmental health and safety laws are in constant motion to protect the public welfare. What CEQA (California Environmental Quality Act) and NEPA (National Energy Policy Act) began for the embryonic environmental movement of the 1970’s, the federal Superfund, CERCLA (Comprehensive Environ­mental Response, Compensation and Liability Act), SARA (Superfund Amendments and Reauthorization Act) and RCRA (Resource Conser­vation and Recovery Act) have for­malized in recent years. Collectively, these environmental laws have altered business as usual for the coming decades.

Questions To Ask 

Suppose you find a potential site that looks terrific, with green grass, an idyllic pond, and a new asphalt parking lot. But you want to know why this 30-year-old building was just repainted, what sins the new as­phalt has covered, and how deep the pond is. You’re even more concerned about the funny smells from the in­dustrial building next door — the building is dark, the windows are dirty and the prevailing wind is coming from their property over yours. 

Groundwater may also be an is­sue, perhaps not even from contami­nation from your site, but from migra­tion from the property next door. If you bought property in Los Angeles County, there is a good chance that you would be on, near, or close to areas which have contaminated groundwater. Some groundwater­ — which is simply water in the soil — may only move one foot per year. Contamination, therefore, may take years to build up noticeably on your “new” property. 

Also, the source for groundwater contamination may be miles away. The San Fernando Valley, for ex­ample, is underlain by three large areas defined by the EPA as Superfund Cleanup Sites. The contamination is pervasive but, unfortunately, so are the suspected pollution sources. 

With the asphalt, the issue is “what dark secrets are hidden beneath the soil?” What was the property used for 10 or 20 years ago? Now that we think about it, what other buildings are in proximity to our site? Shouldn’t we take a look at their operations and find out if any areas near ours also show up on the various toxic and hazardous waste lists? 

Environmental Audits 

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Uncovering known data is in es­sence what is covered by what is commonly called a Phase One Environmental Audit. This is the new buzzword for an anthology of what is known environmentally about a par­cel and its surrounding area. There are no state or federal statutory re­quirements for what must be con­tained in these reports. Phase One audits are limited to a search of the public records, available documents, and visual observations.

These environmental audits should be performed before you purchase a property. In fact, most banks today require a Phase One Audit before they approve financing (though few banks can interpret the audits stacked on their desks). Registered Environmental Assessors are licensed by the State of California to provide quali­fied opinions to assess the environ­mental assets of most parcels. 

An audit should seek to 1) identify potential problems; 2) define the source of problems; and 3) try to bound the liability. To help identify potential environmental problems, there are 15 federal and state lists that can identify potential offenders. It takes time to find lists for a particular parcel and then do the legwork to follow up on the accumulated data. Analyzing the significance of these activities requires some expertise.

If additional work is needed to characterize a site, a Phase Two audit will be recommended, a process de­signed to gather information that does not come easily from public records. For example, to examine how past activities have affected the ground­water on the site, subsurface geologic data must be examined. Phase Two studies are characterized by intrusive sampling: holes are drilled into the soil and samples are sent to a labora­tory for analysis of any contamina­tion. 

Phase Three investigations, to complete the cycle, usually involve cleanup and removal of any contami­nation or other corrective action. 

Your Liability 

Once you purchase a parcel, you may be subject to strict liability with regard to any contamination. That is, if you own the property, you own the problem, and its cleanup costs. Prov­ing to EPA that you are not respon­sible may be your problem, after the fact. 

One would expect that you would be protected from EPA if you, as the prospective owner, could be exempted as an innocent landowner (i.e, you did nothing to cause the contamina­tion) or you performed appropriate due diligence activities to assure that the property was clean. EPA may feel, however, that if the problem arises after such attempts and you haven’t been exempted, your due diligence may have been insufficient. In EPA’s attempt to find Principal Responsible Parties (PRPs) the cur­rent owner may not be passed over in its search to fund a shortfall in pro­jected cleanup costs of over $500 billion. 

Be Careful! 

Even though your property was clean when you bought it or rented to others, all bets are off if the environ­mental legislation has become more restrictive. The concept of “grand­fathering” does not have an equiva­lent in the environmental arena. If the rules change, so must your response. 

Ignorance provides no relief from liability. Therefore, when dealing with environmental regulations, protect­ing you or your clients requires ongo­ing due diligence and attention.

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© 2022 The Planning Report | David Abel, Publisher, ABL, Inc.