For the average real estate investor, properties with a history of environmental contamination present significant risk and frequently touch off such negative feelings that investors may reflexively label the property as unacceptable. The burden of overcoming environmental issues may seem daunting, driving investors to “safer” investments. Savvy developers, however, know to look beyond the blemishes to determine if there is real opportunity. Many developers recognize that these issues can be navigated successfully to minimize potential liability. An underground storage tank that may have developed leaks, a significant red flag for the average real estate investor, can usually be managed, removed and closed, and often paid for with state resources.
If you are the typical risk-averse investor, without the experience and technical background in environmental matters, where do you look for the guidance that’s necessary to obtain a useful analysis of the extent of the problem, its real impact on the property and an understanding of how to deal with the various state and federal requirements applicable to managing and remediating such conditions?
Let’s address the answer in the context of a specific example transaction. Suppose you are an investor in the 45-day window to identify potential replacement properties for the back end of a 1031 exchange and, in the course of evaluating potential replacement properties, you’ve found an otherwise qualified property, with construction in progress, leased to a national tenant with AA credit, but the broker has advised you that the property is an EPA Superfund site. Does this automatically disqualify the property as acceptable for your portfolio? A lot of investors wouldn’t spend any more time considering the property. But, is that the wisest move? Answer: you don’t know unless you obtain a thorough and accurate analysis of the property condition, a professional evaluation of the risks, if any, that you are likely to be confronted with as an owner of the property, and expert recommendations regarding any remediation (whether current or future) and/or compliance work that would be necessary to render the property usable for its intended purpose.
Environmentally contaminated sites go through a multi-phased life span; even those classified as brownfields can eventually be returned to developable, usable condition, although some restrictions will almost certainly apply.
The analysis for the investor depends on the following:
- Original Contamination: Was it oil and petroleum products, spoils from decades of munitions production common in Virginia’s tidewater areas, benzene (highly toxic) or runoff from an old mining or manufacturing facility? This list goes on.
- Proposed Use: Commercial uses can frequently be accommodated post remediation while residential uses are less likely.
- State and Federal Agreements: Determine the extent to which state and/or federal orders and agreements are in place and what remediation has been performed to order to comply with those orders.
The right team of advisers can provide wary investors with confidence in evaluating the potential of environmentally contaminated properties. Experience environmental counsel regularly deal with the identification, analysis and resolution of environmental and other due diligence issues and can provide helpful guidance on the risks posed by environmental contamination; the potential for increased costs related to the investment; and the governmental requirements and resources necessary to efficiently navigate the management and/or remediation of the condition.
Luis F. Ruiz