The purchase or sale of a drycleaner property and business is a delicate dance between the parties involved because of the potential discovery of PCE contamination and other environmental liabilities during the due diligence process. Luckily, there are options available to both buyer and seller to keep a deal from falling through. First, you need to enlist a trusted environmental professional to assess areas of concern properly. Second, you need to hire an experienced environmental attorney to shepherd the negotiation through the proper legal mechanisms, environmental liability, purchase of the business or the property itself, as well as utilizing insurance assets to bargain for a fair deal.
EnviroForensics recently aired a webinar on this topic, and this article is a synopsis of the Question & Answer portion of that event. During the webinar, I was joined by EnviroForensics’ Partner, David Hoffman, who is a professional geologist and a Licensed Site Remediation Professional (LSRP) in the state of New Jersey and Partner at Scarinci Hollenbeck, John Scagnelli who gave their opinions pertaining to how to buy or sell a drycleaner. We discussed the differences between Phase I Environmental Site Assessments (ESAs) and Phase II ESAs and what to do to keep the deal alive if contamination is found during this process. I’ve selected several Q&A’s from the webinar, as follows.
What Happens If Contamination Is Found During Due Diligence? Does That Mean I Can’t Sell?
JOHN SCAGNELLI: No, it doesn’t mean you can’t sell. It basically means that the extent of that contamination needs to be understood and determined, and the cost to remediate should be estimated. Once you’ve done that, both parties can either agree to an adjustment to the purchase price with either the buyer or the seller addressing the liability before closing, or the seller can accept responsibility and remediate the contamination after the closing. So, no. Finding contamination during due diligence does not mean you can’t sell the property. It means that you have to adjust the parameters of the sales transaction to take that contamination into account.
JEFF CARNAHAN: The bottom line is you’re going to have to face the possibility that there could be impacts and you need to be willing to devise a plan to deal with that liability in order to get the deal done. In my experience, it’s sort of like playing hot potato with that liability and seeing where it lands.
DAVID HOFFMAN: In order to do what John suggested you need to utilize an environmental consultant that can vet costs and cost parameters to whatever the condition or problem might be, and you would need to use an attorney that is capable of handling a transaction that has an environmental aspect to it. An attorney with environmental experience can properly set up the transaction in escrow perhaps or use any other mechanisms at their disposal so that the transaction can go forward.
Learn how to sell a drycleaning business in three steps How Much Does A Phase I ESA Cost?
DAVID: Phase I Site Assessments are site specific and they can vary and change depending on the length of time the business was there and the size of the property. So, they can vary between $1,500 to $4,000 depending on the property. For example, a single building retail site would fall in the middle of that range.
JEFF: I’d add that Phase I Environmental Site Assessments can be considered commodity work by buyers and sellers and by lending institutions. A lot of times, they’ll see a Phase I as just checking a box because in the world of buying and selling across most industries. Environmental contamination is not an everyday situation. But, with drycleaners it definitely should be anticipated. The reason I bring that up is to warn you to be cautious when looking for the lowest cost provider. When you’re talking about this much liability, don’t let that responsibility fall into the hands of the lowest cost provider. Choose your team based on skills and capabilities and past experience.
What Percentage Of Your Phase I Studies Of Drycleaners Lead To A Phase II?
DAVID: My answer would be most. The reasons being that most drycleaners have been there for a while, we have the REC of the drycleaning machine, the industrial process of handling the chemistry, the operation of the still and the waste storage area which is where the safety clean containers are. These are all RECs that require testing and sampling in a Phase II. If we’re talking about a drop store that’s always been a drop store, then those RECs I just mentioned don’t exist.
JEFF: I’d agree with that David, and I wouldn’t just say “most” I’d go one step further and say “most plus.” In my experience, the mere presence of a drycleaner will cause many small business administration lenders to ask for a Phase II despite what the operational history in the databases may show.
DAVID: The other important thing is that in order to gain the protection and be successful in this process, the environmental professional actually has to look for the contamination and make a diligent effort to find it. The Phase I on the drycleaner that says “no further action” might seem like a good thing on the surface, but without a diligent effort to find environmental contamination, it could create a hodgepodge of legal problems in the future.
Twenty Years After A Dry Cleaner Has Left The Location Would A Phase I Likely Identify The Old Drycleaners’ Existence?
DAVID: The answer is yes because the Phase I does a historical search of the site, the location and all the prior uses going back to when the site was vegetative in order to meet the requirement. Some of the insurance maps that were drawn long ago still exist and they go back to the 1890’s.
JOHN: Another implication of this question would be “is it possible to go back after the drycleaner who was on the property 20 years ago for cost recovery for remediation of environmental contamination?” If you’re seeking cost recovery against that drycleaner for cleaning up that contamination 20 years after its left the property, you have to have some proof linking that drycleaner to discharges relating to its operations.
Are Phase II Surveys Costly?
JOHN: The cost of doing a Phase II is a function of what parts of the property were identified as areas of concern during the Phase I and the different media (soil, groundwater, soil gas, etc.) you are investigating, so your cost will be variable based on those factors. You want to make sure that your environmental professional follows the Phase I results and delineates areas that are suggested by the Phase I results. You want to go as narrowly as possible to accomplish the objective. That said, it’s very difficult to provide any estimate of cost.
JEFF: To add to John’s point about starting as narrowly as possible, that’s the key. It’s not just “go out and make a science project of this property,” it’s “look at those areas that the Phase I has identified, and hone in on those areas. And, John’s right about the costs of a Phase II varying. That said, I’m personally comfortable saying that a Phase II can range between $15,000 to $25,000.
DAVID: The reason there’s such a spread is that no one can know the breadth of a Phase II without the results of a Phase I. I would be very suspicious of any Phase II estimate that is given to a client before a Phase I is complete.
Understanding what you need to know when buying or selling a drycleaning property is an important step in the process. If anything here rang true for you, or if you want to know more about buying or selling a drycleaning property, you can watch the entire webinar here. Need to paste URL ??? Need to get it