Making Financially Sound Environmental Remediation Decisions
Many years ago, when I was a younger man just waiting for life to teach me the lessons I’d need, I had a brown, four-door 1976 Ford Maverick. This thing wasn’t pretty, and it certainly wasn’t cool, but it got me to school and to work, and occasionally it would deliver a brave girl and I to the movies on a Saturday night. I spent the time needed to change the oil and replace the filters, but for the most part I took for granted how important it was to me. One day on my way to somewhere, I heard an awful clunk and it just died. The first thought through my head was, “Oh no! How much is this going to cost me?” After a $50 tow to the shop and following several hours of waiting, the mechanic asked me this question, “Well son, do you want it to run, or do you want it fixed?”
I’m sure you can figure out the rest of the story. Since I was counting pennies at the time, I chose to have the minimum amount of work done to get my car running and back on the road immediately for the cheapest amount possible, rather than investing the time and money into getting it fixed correctly. I won’t bore you with the details but be assured that when that old Maverick died for good soon after, I was left high and dry with no transportation and wishing I’d have made a different decision a few months prior. That was an important lesson for me, and one that I keep with me.
Tip: Fix things right, and the investment will more than pay for itself.
I’d love to say that it only took that one incident for me to learn this lesson. It’s funny how life keeps giving you opportunities to learn.
Most of us have an example of how we’ve experienced this situation in the past, but when these types of decisions must be made in business it’s even trickier. In your experience, was it during a dry cleaning machine repair job or when fixing a leaky roof, or even as you tried to put yet another quick fix on that temperamental boiler? Environmental cleanups probably don’t come to mind for most folks, but the exact same thing applies for them. There are three components to dealing with an environmental contamination problem:
1) Immediately halting any human exposure to chemicals that may be occurring;
2) Cleaning up the contamination on-site and off-site; and
3) Getting a Closure, or No Further Action, Letter from the state regulatory agency.
Once the necessary work has been conducted to stop human exposure, the question then becomes, “Now, do you want it clean, or do you just want a regulatory closure?” This may be putting the cart before the horse a little bit, but let’s leave the discussion about why immediately halting human exposure is top priority and non-negotiable for a later edition, and let’s focus on the interplay between cleaning up and getting regulatory closure.
What Does “Clean” Mean in an Environmental Cleanup?
When performing an environmental cleanup, there is very little basis to involve the word clean. True clean never really occurs. There are only various levels of not quite clean, and at some point, it’s clean enough. In the world of environmental contamination there are numerous people setting the standard for when a property can be called clean enough. Most regulators worry mainly about two things beyond the current human exposure component; (1) ensuring that the contamination problem is getting better rather than worse and (2) ensuring that there is no threat of future human or ecological exposure. Believe it or not, your property doesn’t have to be very clean at all for these boxes to be checked. Other parties who will be deciding if your property is clean enough are future purchasers and their financial lenders. They will not only be looking at whether you have a regulatory closure, but they will also be using the general environmental health of the property to help determine its practical value. This is a component that often gets overlooked when deciding how clean is clean enough. If the money isn’t spent during the first crack at environmental remedy, it could cost a significant amount of money later in the form of a lower property value when it’s time to sell, or a requirement for additional environmental work to be performed to even attract qualified purchasers.
Tip: The trick is to strike just the right balance between spending money on active environmental cleanup, and the future costs that could arise. This will be a little different for most everyone facing these decisions, but the fundamental thought process remains the same.
What does Regulatory Closure Mean for Dry Cleaners?
Some state environmental regulators have very prescribed cleanup standards that have been put in place for regulated chemicals and are based upon certain human exposure scenarios given various land uses. For example, the cleanup standard for tetrachloroethene (PCE, or Perc) is much less stringent for properties which are and will remain commercial or industrial in nature, as opposed to used for residential purposes. This is because commercial property users spend much less time at the property than a residential user would and are engaging in activities that are much less likely to put them in contact with subsurface contamination than the residential user. So even when regulators strictly apply cleanup standards, their definition of clean is different for commercial and residential properties.
Other states allow for the person or business entity responsible for the contamination (Responsible Party, or RP) to decide how clean is clean enough by giving them the option to determine ongoing land usage more specifically with deed restrictions that limit the type of activities property owners and users can perform. A classic example is turning a contaminated property into a parking lot, and then putting in place a deed restriction or covenant that states that the property must always remain a parking lot, and it must be maintained that way, so no one can come into contact with the contamination. In this scenario, there is no need to perform much contaminant removal beyond what is necessary to keep it from spreading to other properties beyond the owner’s control. The presence of the well-maintained parking lot surface and the accompanying deed restrictions essentially remove the risk of human exposure. This type of regulatory closure is called a Risk-Based Closure. Many RPs initially love to employ such Risk-Based Closures because they are much cheaper initially than those remedies where a substantial amount of cleanup occurs. But keep in mind the little story about my old Ford Maverick. “Do you want it fixed, or do you just want it to run?” Well, do you want it clean, which restores your property to fair market value and provides you with a more robust set of reuse options, or do you just want a regulatory closure, which doesn’t restore your property to fair market value and limits future reuse options?
Settling for a pure Risk-Based Closure in lieu of a significant active cleanup can negatively impact the value of your property. I’m not saying complete elimination of environmental impacts is wise, or even possible. In fact, most of the time, it’s not even realistic to assume that every molecule of contamination can be removed from the soil, groundwater and soil gas after an environmental release. As such, nearly every remedy contains some component of a Risk-Based Cleanup. As I mentioned a bit earlier, the trick is finding the right balance that incorporates not only your wants and needs regarding post-closure usage of your property, but also takes into consideration your ability to shoulder the significant cost of active remedy.
Environmental cleanup is a very costly endeavor, and it can heavily burden a business. Depending on how your business is set up, the liability for contamination could actually lie with you personally. Before you make that decision about how clean is clean enough, carefully consider all that you can afford. If you can swing it, the investment in a cleaner site will pay off in the future. Be sure to consider all your financial assets that can be used to pay for environmental cleanup.
Tip: Remember that past commercial general liability insurance policies can be triggered to pay for environmental cleanup. Especially since most environmental releases also occurred in the past.
By levering as much cleanup power and by choosing the best cleanup option, you can add value back to your contaminated property for future reimbursement. I wish the decision I made back with my Ford Maverick had been, “I want it to run, and I want it fixed.” As is the case for many dry cleaners, you’ll be better off if you get a regulatory closure and a cleanup.