Learn how a Phase I Environmental Site Assessment can prevent a bad investment and ultimately save you money.
We conduct Phase I ESA services all over the United States for our clients, and that means we've seen some crazy things. Over the years, we've seen some of our clients walk away from what seemed like great deals because the results of the Phase I highlighted some serious issues, and it was ultimately determined buying the property wasn't a good investment.
While some think a Phase I is just a check-off on a laundry list of items when conducting a property transaction, discenrning business owners known that good environmental due diligence can provide real protection against future liability should any contamination be found in the future from past activities.
Perhaps one of the best protections it can provide is to present a prospective buyer with the information necessary to place conditions on the transaction in order to protect their interests, or to avoid the transaction altogether. You might be wondering...
How does a Phase I ESA prevent a bad investment?
Let me give you an example of how a Phase I Environmental Site Assessment prevented a bad investment. We were involved in one case which clearly and easily illustrates the point. While I can't provide specific details, I'll speak in generalities.
Our client was acquiring another company and all of their properties and assets. One of them, an industrial plant, was heavily involved in petroleum handling activities for something like 40+ years on the site. The site was truly one of the worst I have ever seen, yet there had been no reported incidents of releases or contamination in the past.
It was simply taken for granted that "that is how this type of business operates". You don't need formal training or great knowledge in environmental due diligence issues to know that whoever acquired this property (in this case our client) was going to inherit a very significant cleanup of petroleum contaminated soil, and very possibly underlying groundwater and subsurface soils. The site was a real mess.
So we did the Phase I, even though it was pretty plain what was going on. Background research into history of the site (which overall didn't appear too bad), regulatory records review (came up fairly standard), interviews (folks seemed to think their operation was pretty standard stuff), and a thorough site inspection.
The site inspection was the capper - the site was a mess. Everything, including virtually the entire ground surface, was covered with dark oil staining. I was stunned because it's hard to believe no state inspector ever had an issue with the site in the past, but that's an argument for another day.
So what did we advise? Nothing about the deal itself, because that's not our job. What we did was outline the findings and make recommendations for further actions at the facility. We gave the necessary information to our prospective buyer client so that they could put it into the context of their transaction.
Our client, however, followed up with a series of astute questions.
- What will a Phase II investigation to get a better handle on the extent of contamination cost?
- What do you think cleanup costs might be?
- What do you think the extent of our liability will be?
- What do you think the regulators will say about the site going forward?
Long story short, our professional opinion was the clean-up costs, potential contamination, and overall liability would be an expensive nightmare for them. All in all, it was going to become a money pit.
So our client pulled out. They just didn't want the costs or the headaches, dealing with someone else’s mess. The value potentially gained by moving forward did not outweigh the potential costs and liability. Conceivably, it could have cost more to investigate and cleanup than the property was even worth.
Sure this is an extreme example, but things like this do happen.
Does a Phase I Environmental Site Assessment prevent a lot of transactions?
For whatever reason, this hasn't happened all that often to us. Maybe it's just dumb luck, but it seems like most of the deals we get involved with providing Phase I ESA services have been vetted to some degree, and we usually don't come across real horror show sites or businesses.
What we do come across - a lot - is properties or businesses with some form of environmental issues.
For example, we commonly see contamination on a smaller scale than the story above. Usually, the same questions apply. What will it cost to clean it up? Are the costs justified in light of the investment to be made? Will we be protected against future liability or costs?
To answer all of these questions, you start off with your Phase I. It's the vehicle for finding out what's going on at the property, placing some boundaries around potential issues, creating benchmarks for further investigation or remedial activities, and most importantly… for making sound business decisions by prospective buyers in order to prevent a bad investment.
Protection against a bad investment isn't the only reason for a Phase I Environmental Site Assessment. The protections against liability if contamination is found are very profound reasons to do one. I could argue that gaining information from the Phase I ESA process that keeps a prospective buyer out of the deal in the first place is a very, very good reason to do one.
When you realize the incredible value that you gain from a Phase I Environmental Site Assessment, why would anyone think of it only as a check-off item? It pains me to see people get a Phase I solely on price, but hey, it's not my money or business on the line.