FEATURE ARTICLE, JUNE 2006

MAKING A DEAL ON CONTAMINATED PROPERTIES
Michael Whitehead and Chris Schultz

Finding a great deal is every brokers challenge and every investor’s good fortune. Finding contamination and having investigation/remediation costs cut into profits or kill the deal is an unwanted nightmare. Contaminated properties are virtually everywhere in Texas from the historically developed inner cities to small country towns. Sometimes the danger lies hidden in small, undeveloped properties and other times it’s just plain obvious. Sooner or later, most brokers, developers or investors have to deal with contaminated properties. 

Common environmental contaminants include cleaning solvents, fuel products (gasoline and diesel), oils/greases, asbestos, and metals such as lead, arsenic, chromium, cadmium, and mercury.  Occasionally, sites have more exotic contaminants like polychlorinated biphenyls (PCBs), dioxin, herbicides, pesticides and complex hydrocarbons. The common sources of these contaminants are dry cleaners (solvents such as tetrachloroethene or “perc”), printers (solvents), auto body/maintenance shops (solvents, oils, and metals), agricultural operations (herbicides, pesticides, and arsenic), and industrial facilities (solvents, oils, and metals). Asbestos is present in a wide assortment of older (pre-1980) building materials. 

There are several key strategies for buying or selling of impacted properties in Texas.

— Accurate assessment of environmental liabilities (risks) and associated costs;

— Voluntary Cleanup Program (VCP) and Innocent Owner/Operator Program (IOP);

— Municipal Setting Designation (MSD); and

— Dry Cleaner Remediation Program (DCRP).

Accurate Assessment and Cost Estimating

An accurate assessment of the property is critical in determining the environmental liabilities/risks and estimating the costs to resolve them. Unfortunately, when you buy the property, you also buy the contamination. If contamination is missed, the new owner will inherit the problems and eventually pay for them. For the developer, project delays will generally occur when contamination is encountered.

The solution is an accurate Phase I Environmental Site Assessment (ESA). The EPA’s new All Appropriate Inquiry (AAI) regulations will aid in reducing this problem because of the certification requirements for consultants. 

Any environmental concerns noted in the Phase I ESA should be resolved by sampling (Phase II) or further research.  Once the assessment is completed, the costs to remediate and close the site (such as approval from state regulators) are determined. These costs need to in-clude all phases of the assessment leading to the final closure of the site. Remediation/closure costs can then be reflected in a purchase price reduction or es-crow amount paid when the site receives certification of the closure.  

Voluntary Cleanup and Innocent Owner Programs

The TCEQ’s VCP is an excellent program for addressing properties that have been impacted from current or historical owners or operators of the property. It’s a process where the owner/operator addresses the contamination voluntarily rather than under enforcement from the state. At the completion of the VCP, the TCEQ provides the owner(s) with a Certificate of Completion (COC), which runs with the ownership of the land. Once an owner receives a VCP Certificate, it is very difficult for the contamination issues to be re-opened. In fact, only two sites have been reopened by the TCEQ and both of these were re-opened at the request of the property owner.

The TCEQ’s IOP is limited to impacted properties that can prove they did not cause or contribute to the contamination. An IOP is applicable to sites impacted from off-site sources such as neighboring dry cleaners or service stations. It does not apply to sites historically impacted from previous owners of the property (on-site source). Unlike the VCP, the IOP is not transferable to the next owner (must reapply or be added as a joint applicant). With an IOP, the applicant is not required to determine the source of contamination, extent of contamination, cleanup of the site or perform on-going groundwater monitoring. In some cases, the IOP applicant can get the off-site property owner to pay for the IOP.

Municipal Setting Designation

MSD is a recent state designation given to properties within a municipality certifying that designated groundwater is not used as potable water. The prohibition is in the form of a city ordinance and has several key eligibility requirements including population of the municipality (20,000 people) and availability of a public water supply system. Essentially, the MSD eliminates ingestion of groundwater as a risk factor and substantially increases the assessment and cleanup levels for contaminants in both the soil and groundwater. In many cases, the MSD can eliminate or significantly reduce the amount of soil and/or groundwater remediation. According to the TCEQ, several cities in Texas have already adopted an MSD ordinance: Dallas, Fort Worth, Grand Prairie, Grapevine, McKinney and Beaumont.

The MSD is an excellent option for addressing sites in selected municipalities impacted with chlorinated solvents with only limited, or in some cases, no soil or groundwater remediation. The MSD is then combined with another regulatory program like VCP to complete the closure process. 

Dry Cleaner Remediation Program

The TCEQ established the DCRP to pay for the assessment and remediation of dry cleaner sites. A property owner or dry cleaner operator can enter into the DCRP by completing an application to the state. The TCEQ will then determine a score/ranking for the site and direct their selected contractors to perform the work.  When a site enters the DCRP, the property owner is no longer responsible for sampling, on-going monitoring or remediation. However, there is a $5,000 deductible for the program. The key drawbacks to the DCRP are schedule to complete the closure process, re-ranking or shuffling of your site, and contamination from other sources like service stations that may eventually preclude your site from the program.

Contaminated properties may have been looked at as bad news and environmental consultants as deal blowers in the past, but environmentally impacted properties can be great deals and environmental consultants your deal maker ally. The more you know and the better your team, the more likely you will be successful in your deal. So, the next time you hear it can’t be done, look at the options and the potential benefits of purchasing contaminated properties.

Michael Whitehead is president and CEO and Chris Schultz is a project manager with Plano, Texas-based W&M Environmental Group.

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