Recently, I wrote about a seller doing their own Environmental Site Assessment (ESA) prior to putting a property up for sale. There were some specific reasons for doing this, including: there was no other prior report, the type of property, and the type of tenants. Now, I’m going to the other side of the seesaw; should the buyer accept the seller’s Environmental Site Assessment? When the seller’s report comes from a reputable consultant that they are familiar with, then perhaps, the buyer can rest a little more easily about relying upon the report. However, the buyer should always be wary of a consultant that might make a report “look good” in order to help the seller out.
Here’s a negative example of what can happen when the ESA comes from the other side of the table:
I was in charge of physical due diligence for a pension fund real estate advisor. An acquisition, in the early 1990′s, was close to the final stage when the business people pressed my boss and I to accept the seller’s Phase I ESA for an industrial park and forgo doing one ourselves. The only issue noted in the report was the asbestos-containing tile in the buildings’ office areas. The consultant had talked to a state environmental representative who had said that there were no notices on file for the property. While I was against the idea of accepting the seller’s Phase I ESA because of the property type, the business people prevailed.
Keep in mind, this transaction was in the very early days of Environmental Site Assessments. The ESA industry was in its infancy. The ASTM E50 committee on Environmental Site Assessments and the database company, Environmental Data Resources (EDR), had just been founded in 1990. People didn’t use reliance letters.
Six months after closing, one of our senior partners received a notice from the state’s Environmental Department inviting him to attend a meeting for owners in the area to discuss the regional groundwater contamination. This was a complete surprise and my boss asked that I look into the water contamination concern.
I reviewed the report again and found no mention of a problem. I called the state environmental agency and asked to talk with the representative listed in the report. I was told there was nobody there with that name; however there was someone there who had a similar sounding name. I made an appointment with him.
The state representative showed me a cart filled with boxes of files. He explained the problem. A forty year old railroad depot was a few miles away, where locomotives were repaired. There were above and below ground storage tanks and underground piping. All were leaking oil. Contamination had been discovered in the groundwater draining into a nearby abandoned quarry which had started the site investigation. There had been a lot of work already done by the depot owner.
I asked the state representative if he remembered talking to someone about our industrial park. He couldn’t say for sure, but he commented that he had received several consultants’ calls that went, “I’m calling about this property, are there any issues at this location?” He would tell the caller if the property was on the list or not and the caller usually thanked him and hung up. He didn’t think that he needed to tell a consultant that his job was to look at the area surrounding the property, not just the property.
From looking at the files, I found that there were groundwater wells within a mile of our property that did not show any contamination. The depot owners had been identified as the responsible parties.
This was good news but the investor was very unhappy with the facts. My company did not get any future deals. The investor didn’t acknowledge that we had relied on his consultant’s report.
Hindsight is always perfect, but there was already a procedure at that time in place of reviewing historical aerial photographs. After review, a diligent consultant might have started asking questions about the nearby railroad yards.
The seller is required to disclose his knowledge and his ESA would be part of this. It is up to the buyer to agree to rely upon it. If you have a good relationship with your environmental consultant, you should have a conversation early on in the deal about what he may know about the property area.
It’s really a case by case issue. Today’s due diligence is more sophisticated than it was in the ‘90s, but just like the seller doing an Environmental Site Assessment, the buyer has to consider the building type, location, age and apparent condition from a consultant’s visits early on in the deal to decide if they can put their reliance on a third party report.