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What’s the Risk?

What’s the Risk?

What’s the Risk?: Breaking Down Environmental Liability

Environmental liability seems to be this abstract concept… until it happens.

Here is how it usually happens.

You decided to purchase some commercial real estate. You find the perfect property for your business and talk to the bank about getting a loan. You submit all your financial statements and enough documentation that a small forest in the Northwest needs to be replanted.

Then you wait.

The bank comes back and says you are approved for the loan, however, you need a Phase I Environmental Site Assessment (ESA).

What the bank doesn’t tell you is that this is just one piece of environmental due diligence needed for liability protection. Most people don’t give it a second thought, find an environmental consultant, get bids, and go with the consultant with the lowest price. They hand the completed Phase I ESA over to the banker and the banker checks a box and approves your loan.

So, you’re in the clear now and can close the deal, right?

Well, you can close the deal, but if you didn’t do everything else for the liability protections, you just purchased all the environmental liability that came with the real estate.

Well Eric, what environmental liability did I just purchase?

I am glad you asked. You purchased all the environmental liability associated with the property before you owned it. It does not matter if you spilled chemicals on the property or not, you can be held liable. For instance, let say you purchase a building and there was an underground tank that you should have known about. If that tank is leaking, you can be held liable for the associated cleanup of the contamination, not only on your property, but on the neighboring properties also. Once the neighbors find out, you may find yourself in court defending yourself also.

Environmental liability could be small in the range of tens of thousands of dollars to large in the range of tens of millions of dollars or more. Further, the amount of environmental liability can change over time. On the favorable side, some types of contamination may degrade with age, which would reduce your liability. Other contamination will spread out and increase your liability. Then you also have the risk of illness. Recently, in Hoosick Falls, NY, three companies settled a class action lawsuit for PFAS contamination that impacted the water supply. You can read more about this here. The settlement requires medical monitoring of the affected residents for 10 years and cost the responsible parties over $65 million.

The scary part here is that the potential for PFAS contamination is not covered by the standard for Phase I ESAs. However, we do expect changes in the standard later in 2021 to address this.

So, if you had purchased property associated with this site and had done your due diligence, you would have likely been in court trying to get yourself dismissed from the case. Think about it… $65 million was just the settlement cost. What about the fees of the attorneys and other consultants and experts? Those add up too! The residents and the other companies would be looking for any deficiency in your environmental due diligence to keep you from getting dismissed. The other parties want you in the case to help share the costs.

But I had a Phase I ESA! I thought I was protected!!!

Even if you have a Phase I ESA, you may not be protected. Did you read the Phase I ESA? Do you know enough about the “All Appropriate Inquiry” requirements to know that the Phase I ESA was done properly? Chances are no and here is the problem…

Most consultants do as little work as possible to be cheap and turn a profit.

Unfortunately, they don’t care if you are protected or not. The win the work, do it as profitably as possible, and move on to the next client. To do this, they leave out work that costs them money that they are not required to do, but it is required to be done. They leave it to the purchaser to complete and many times they don’t even tell them. The other thing that they don’t tell you is that there is a list of other items that you need to complete besides the Phase I ESA to qualify for the liability protection.

Eric, I don’t know anything about these liability protections. How do I protect myself?

Sorry for the shameless plug, but hire Hanis Consulting! Or at least hire a consultant that will give you the same white-glove service that we do. A good consultant will walk you through the liability protection requirements. They will not only perform the Phase I ESA, but they will also perform the other requirements that are not required to be performed by the consultant, such as an environmental lien search. They should also offer to prepare a “Due Care Plan” and an “Environmental Liability Protection Memo”. You shouldn’t have to ask about these, they should be offered. They are also going to cost extra money.

To break this down in simple terms, here are your options:

  • You can blindly spend $1,400 on a $750,000 purchase and end up with $65 million in environmental liability.
  • You can do #1 above and then have your attorney help plug the holes at $300 to $500 per hour. (Note: most commercial real estate attorneys are NOT environmental experts. They may call in additional attorneys for help.)
  • Hire a consultant that will make sure everything is completed and that you are protected.

I have been doing this type of work for over 20 years and boy have I seen some things. Here is my Top 10 List of Consultant Screw-Ups that left their clients in a bad position and the client didn’t even know it.

  • 10. Environmental Lien search not performed (very common)
  • 9. Key site personnel interviews not performed
  • 8. City directory search not performed and the property was not identified correctly (Read more here)
  • 7. Consultant did not search the spill database and missed a spill on the property
  • 6. Consultant did not understand laboratory detection limits and said the property was contaminated when it wasn’t
  • 5. Replaced the historic aerial photograph search with the current Google Maps satellite view screenshot
  • 4. Overlooked an underground storage tank on the fire insurance maps which was still in place (and leaking)
  • 3. Did not review environmental reports that were publicly available showing contamination flowing in the opposite direction
  • 2. Consultant didn’t tell the client they couldn’t dig on the property, which unearthed contamination that was supposed to remain buried. And …

How do I protect myself, then?

In the end, the answer is simple. You have to trust your consultant.

The not so simple question is: what consultant do I trust?

Let’s put this in perspective. Do you trust the guy on the street corner trying to sell you a Rolex for $1,000? You know the value of a Rolex is more than $1,000 so you know something is wrong. It must be fake, broken, or stolen. Would it make any difference if the guy was in a suit and tie? Of course not! What if he invited you into a nice plush downtown Chicago office? Again, of course not, because there is not such thing as a $1,000 Rolex.

Now, let’s take it another step. Would you insure your property by buying a $2 lottery ticket? Absolutely not! It is not a sure thing.

Now, would you insure your property by purchasing a $10,000 policy, but not be allowed to read the exclusions? Again, you are taking a gamble just like the lottery ticket. What if it was the same policy, but the insurance agent says “Trust me, you’ll be fine”? Again, you want to read that fine print to make sure you are covered if lightning strikes the building and burns it to he ground.

Then why do so many people get a Phase I ESA from a consultant that basically says, “Trust me”? We deal with insurance and purchasing goods on a regular basis, we do not do this with environmental due diligence, so you don’t even know what to look for. That’s the problem.

Here are a few tips to help you select a consultant that you can trust.

  • If you are getting proposals for $1,500 or less, just throw them out! This is the guy trying to sell you a $1,000 Rolex.
  • Be aware if they do not offer any options. There are several things that have to be done and it is optional for the consultant to perform them. If they don’t, you have to.
  • Ask them how much experience the report writer and the field personnel have. Typically, they will use people with little or no experience and they will deflect with: “It is supervised by someone with 10+ years experience”. If they don’t directly answer the question, there are trying to hide something.
  • If they promise an outcome, they are lying. You can’t promise an outcome on a proper Phase I ESA. (Note: One may be able to promise that there is an issue at a site due to personal knowledge. I’ve done this once in 20+ years where I performed 5 different Phase I ESAs all on the same block. This is extremely rare.)
  • Ask them if they can produce a due care plan. Be warned if there is any hesitation or silence. This may catch them off guard and they are trying to think of a response, or if they are inexperienced, they might be trying to figure out what it is.
  • Ask them for a sample report. You can then take the report and compare it to ASTM E1527-13 (ASTM E1527-21 is due to be release later this year) and see if it fulfills all the requirements. (Note: if it does not fulfill ALL the requirements, the you may not get the liability protections.)
  • Ask to see a Certificate of Insurance. If they can’t provide one, run away.
  • Many banks do not properly vet consultants on their “approved” list. Don’t trust that every consultant on their list is good. Vet the consultants yourself.
  • Ask if the Environmental Professional is licensed (such as Professional Engineer or Geologist). Unlicensed professional may perform the work if they have the correct experience, but they have no professional consequences. Licensed professionals have their license at risk.

At the end of the day, you get what you pay for. Environmental due diligence is not something to gamble on. It is unlikely that you will see the effect of poor due diligence right away. You may not know that you are not protected from environmental liability until years or decades later. Are you willing to trust that an environmental consultant with the lowest price has the future of you business as a priority or are they just trying to win business? Nobody cares about your business like you do.

So how do you ensure that the consultant has your best interests in mind?

Unfortunately, you typically can’t unless you become an expert on environmental due diligence and environmental liability. There are a few options to protect yourself, though. One option is to hire an experienced environmental attorney, but they may charge up to $500 per hour and they may not know all the technical aspects. Sometimes they will also hire an outside consultant to assist.

The other option is to hire an environmental consultant that is an environmental due diligence expert to advise you. If they are not performing the Phase I, then they do not have any motivation to cut corners for profit. Hiring an expert advisor, like Hanis Consulting, will cost you half of what an environmental attorney will charge. The only drawback is that no environmental consultant can give legal advice, you must consult an attorney for that. If a consultant says that they will provide you legal advice on you due diligence, run. That is considered “unauthorized practice of law” an is illegal. Only lawyers can provide legal advice.

Why should I hire Hanis Consulting?

Simply put, we have your back. We have spent many years advocating for our clients against less than desirable consultants. In some cases, the clients hired us to redo the work of other consultants after they took shortcuts that exposed the client to liability. We make sure that your environmental due diligence is done correctly so you are protected. We can advise and advocate for you with other consultants; however, it is best to get us involved prior to selecting a consultant so we can help evaluate the proposals. Otherwise, it is likely that they will start issuing change orders when we force them to do what they should be doing in the first place. We can also help easily spot when a consultant is trying to make more work for themselves with unnecessary testing and Phase II ESAs.

In the end, you need an expert in your corner advocating for you. Someone who has your best interests in mind.