Value of Audits: Discussion of environmental considerations before buying/selling a facility

July 8, 2004


Value of Audits

Discussion of environmental considerations before buying/selling a facility

By Sarah Smith

July 2004

Inthe aviation industry, transactions, by nature, consist of numerous,varied, and often competing interests. Conflicting interests may proliferateeven in a simple transaction involving a seller and a buyer, an airportauthority, a financial institute, and an environmental professional. One way to minimize risk is by conducting environmental due diligence.

The buyer and seller perceive any additional cost associated with a transaction as detrimental unless the other party has to pay for it.

If environmental issues are suspected, the buyer may want the seller to be liable and the seller may propose that the buyer take the property (or facility) “as is” with all environmental risk.

The airport may elect to assign a lease in an “as is” condition. In this case the buyer would conduct a baseline evaluation to establish pre-existing conditions of the property at the onset of the lease. For the banker, he basically wants the loan with limited environmental risk.

The objective of the due diligence process should be to thoroughly check the property and use the information to help resolve some of these conflicting interests at the onset of the transaction.

Performing environmental due diligence may not eliminate the uncertainty of contamination beneath the ground, but would more or less characterize the risks into a manageable format that the user can understand and rely on for the acquisition.

Phase One
A Phase I Environmental Site Assessment (ESA) performed in accordance with the scope of ASTM Standard E 1527-97 is the method most commonly used in a commercial transaction to satisfy the process of environmental due diligence.

The ASTM Standard E 1527-97 provides a standard for identifying, gathering, and interpreting historic and current use information associated with the subject property and adjacent parcels.

The far-reaching liability issues of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as Superfund Law, together with the Resource Conservation and Recovery Act (RCRA), which mostly deals with cradle to grave management of hazardous wastes, storage tanks, etc., are the main reasons behind the creation of the ASTM Standard E 1527-97.

CERCLA liability is strict, joint, and several, and looks at the retroactive aspects of the pollution, i.e. who caused it, contributed to it, or owned it; and, it is focused on asset-based liability whereas RCRA is compliance based.

The ASTM Standard E 1527-97 helps to define good commercial and customary practice in conducting a Phase I of a parcel of real estate with respect to the range of contaminants. Due to the nature of airport operations and designation, there may be other contaminants to consider in the Phase I that are not necessarily included in the scope of the ASTM Standard E 1527. This requires a higher and more specialized level of inquiry and knowledge of the business in order to accurately establish the limits of liability.

At an airport, the property owner is usually the airport authority and the transaction involves buying or selling a business or entering into a new lease with the airport authority to develop a parcel of land. The scope of a Phase I is designed to: 1) to provide reliable environmental information as to the current and prior use of the property; 2) to evaluate the status of facility compliance with applicable federal, state, and local regulations that govern the business activities; and, 3) to establish recognized environmental conditions (RECs) associated with the subject property, meaning the presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, past release, or a material threat of release of any hazardous substances or petroleum products onto the property.

The definition of an REC, to some degree, is left to interpretation by the environmental professional who is conducting the Phase I as to what to include and what to leave out. Although it is important to properly identify an REC, it is probably more important to provide an accurate opinion of the potential risks associated with an REC and to have an understanding of the intricacies of airport environmental issues.

History and Liability
In order to establish limits of liability and quantify risk and to establish that seller had no reason to know about certain environmental conditions, the buyer must undertake all appropriate inquiry into the current and previous ownership and uses of the property. (At many airports the previous owner may have been the U.S. military which may require a different level of inquiry.)

Oftentimes the level of inquiry that will be required is not necessarily known at the onset of the assessment, especially if the acquisition is confidential between the parties representing the buyer and the seller.

Subsequent to starting the Phase I investigations (i.e., site visit, compliance database searches, and record reviews), it may be decided to increase the scope of the inquiry. When performing the Phase I ESA, you can always look deeper and gather more information; however, the process is generally not intended to be an exhaustive approach and generally has to be accomplished within specified time limits.

Time constraints are real and limit the ability to gather certain information. Such constraints should be noted as limitations in the Phase I. It’s important to understand to perform a more comprehensive inquiry by expanding (or in some cases limiting) the scope to address specific business risk concerns. Depending on the parcel or business at the airport, the Phase I may require a different level of inquiry.

Phase Two
On occasion, there may be knowledge or strong suspicion that the subject property is contaminated. The Phase I ESA investigations are sometimes conducted for the purpose of identifying and selecting REC’s in preparation for further inquiry to be addressed in the Phase II portion of the project. A Phase II assesses subsurface conditions to confirm the suspicion of potential impact. If the Phase II confirms contamination, the issue may become more complex in determining who is the potentially responsible party for the contamination and if the Phase II findings trigger a regulatory reporting requirement. (And, moreover, who takes the responsibility to report and remedy the site.) For these reasons, the scope of a Phase II should be discussed well in advance of performing the work to avoid conflicts between the buyer and the seller and assignment of the lease by the airport.

Considering the nature of potentially rapid change in the conditions of the property, the shelf life of a report could be perceived as extremely short. The Phase I Report could be obsolete by the time it is written; however, usually the reports are valid for six months, after which certain rules apply to parties that use the information from the Phase I.

Sarah Smith is president of Madison Environmental, an environmental consulting firm based in Boxford, MA. She specializes in FBO/airport-related environmental resolution and management, and has managed projects for aviation, petroleum, and industrial interests. She can be reached at (978) 352-5086.