Anyone involved with the acquisition of an existing self storage facility and especially anyone involved with the purchase of property to be converted to a self storage facility is aware of the due diligence requirements that are part of the deal. With strict liability against property owners being imposed by state and federal authorities for the cost of cleanup, a potential purchaser must perform an adequate investigation of the property to discover and evaluate any possible contamination of the desired site before spending its money. Once that investigation is done, the purchaser can then consider any risks in purchasing the property and handle its negotiations for the purchase of the property in light of the information obtained. The following is a summary of the three phases of property site assessments:
The scope of a site assessment can be as broad or narrow as the purchaser chooses, depending upon that purchaser's goals and willingness to accept risks as it relates to potential environmental hazards on the property and the requirements of the potential lender. A Phase I site assessment includes both a document inquiry as well as a physical walk through of the property. The document investigation should include a review of all records of the facility including identification of its past owners or lessees. For a conversion deal, to the extent the property was used for any manufacturing purposes, the purchaser should determine the products that were made, the nature of the production and any waste disposal created as a result of the manufacturing. Additionally, there should be a formal investigation as to whether there have been any violations or enforcement orders issued by state of federal authorities on the property, and whether there has been any litigation or any liens, judgments or levies on the property. Finally, a determination should be made as to whether there have been any prior environmental evaluations of the property testing for asbestos, PCB, or radon. As for the physical walk through, the property should be evaluated based upon the utilities present (i.e. electric, gas, water, sewer, etc.), whether the site is urban or rural, whether the area is industrial, commercial or residential, and whether there is any surface water or water ways within 500 feet of the property. Certainly, any investigation of the site should address the area surrounding the facility and any potential environmental problems associated with ground water or surface flows from any neighboring facilities. Investigation should be made into whether the property is in a flood plain or if it has ever been flooded. It should be determined whether there are any underground tanks on the property, and whether there is any PCB electrical equipment located on the premises (i.e., transformers, etc.). If there is a building on site, the purchaser should look for the presence of asbestos and lead paint as well as any abandoned wastes.
Based upon the information gathered from the Phase I assessment, a determination will be made whether to proceed to a Phase II assessment. A Phase II assessment involves taking soil and water samples from the property to determine the level (if any) of contaminants found on the property. A Phase II assessment will occur if any contaminants are found at the property or if there is any reasonable evidence to suggest that there may be a problem. Many times, a Phase II assessment will be done regardless of the findings of a Phase I assessment simply to assure the purchaser that no problems exist. All efforts to verify the condition of the property prior to purchase will reduce the risk to the purchaser that something has been overlooked.
The final phase of the process, depending on the results of the Phase I and Phase II assessments, is the remedial work performed to remove the contaminants from the site. If remedial work is to be done, it is likely the cleanup will occur prior to closing and will be paid for by the seller. However, the purchaser may choose to take the property at a reduced price and perform the cleanup itself. Substantial liability exists for a purchaser who does not perform an appropriate inquiry into the previous ownership and uses of the property being purchased. Therefore, a purchaser must not only perform the necessary assessments to evaluate the property, but must also endeavor to allocate its risks, as much as possible, back to the seller. When it comes to environmental risks and purchasing property, a bargain is not always a bargain.
Thanks to Steve Sadiker from Roux, Inc. for suggesting this topic (firstname.lastname@example.org)
This article was originally published in Scott’s “Legal Monthly Minute” Newsletter in June 2019