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Learning about contamination the hard way.

Like much else in life, real estate knowledge is gained by hard-won experience as well as by education. You learn from experience that even the best suburban office building will have trouble leasing if the nearest restaurant is 10 miles away; that the difference of a few words in a lease can limit your rights to prevent undesirable subleases; that an apartment building with only studio units is unlikely to succeed in a middle-class suburb.

The real estate professional confidently relies on his or her own past experiences to avoid the pitfalls in each new deal. Moreover, he or she knows when to turn to attorneys, contractors, and consultants for advice on technical issues.

If you fall into this category--a real estate pro who has seen it all and knows most of the angles, you are in for a rude, and possibly costly, awakening. Reguflation of and concern about environmental liabilities connected with real estate have opened up a vast new range of largely unknown problems.

If you have not done a deal for a while, let me warn you that the rules have changed. Your new list of experts should also include an environmental expert. Being unaware of environmental regulations and liabilities is no protection against expensive environmental cleanup costs if you buy a contaminated property.

If this statement sounds too much like a lecture, it is because I am newly converted. Not very long ago, I was just like you--a seasoned pro, confident that I knew almost everything I needed about what to look for in a real estate deal. It was not until I almost bought a building with significant potential environmental liabilities that I realized all the marketing and renovation knowhow in the world is not worth much if you unknowingly buy a piece of contaminated property.

The age of innocence

My lesson in the importance of environmental liability began when I came across a soon-to-be-vacant 210,000square-foot industrial building in a suburb of Chicago. The manufacturing company, which had been in business at this location since 192Z was eager to sell the building. While most of my experience was in other property types, I felt that a creative renovation of this industrial space for smaller users might be a profitable and challenging adventure.

Seeing the opportunities in the project, I began an extensive investigation of the building. I walked the building with a general contractor, a roofing contractor, and an HVAC specialist to estimate renovation costs. Because the entire property was heated by a large steam boiler, there would be functional problems in retrofitting the space for smaller users. All the while, I was negotiating with the company to lower the original asking price of $900,000.

I was caught up in the excitement of marketing and revitalizing a new project. I was focusing on the physical and functional problems and had put aside the much more dangerous environmental ones.

I was not so naive that I completely ignored the issue of environmental liability. I had reviewed a copy of the Phase I audit commissioned by the manufacturer two years earlier and confidently concluded that I had only minor problems--a few small oil spills and some sludge in one drain. I moved ahead to close the deal--one step closer to environmental liability.

What I failed to see was that the report was a masterpiece of careful writing and judicious omission. The language focused the report on the activities of the company rather than the problems directly associated with the buildings or the grounds upon which they stood. All the problems at the site were concealed between the lines.

The report stated that a plating operation carried on by the manufacturer for 25 years had produced cyanide and other hazardous waste, but assured the reader that the wastes had been "properly manifested and disposed of off site;' Yet no detail was given on the cleanup, and no supporting documentation could be produced. Nor did the owner's consultant volunteer any additional information that acceptable decontamination had indeed been performed.

The oil spills on several parts of the property were mentioned, but were dismissed as being unlikely to produce any significant contamination. Even more revealing was the consultant's effort in the report not to investigate far enough to find any real trouble. "The above discussion assumes that the visible oil is the only contaminant present. [Emphasis added.] Because the scope of this investigation did not include collection and laboratory analysis of environmental samples, it is not possible to assess potential contamination by compounds not visibly apparent."

By choosing not to look for problems, the consultant hired by the owners stayed within the parameters of a Phase 1 audit, but gave no indication that some potential problems needed further exploration. By making the problems appear to be too insignificant to require further testing, the consultant was helping to ensure that no such problems were found.

Yet, I did not recognize the warning signals. I assumed that if there was a problem, the report would say so; that if a finding was questionable, more testing would automatically be done. I had not yet learned that if you want the answers you are looking for, you need to commission and pay for your own environmental report. I moved ahead. I should have stopped then, and so should you.

The awakening

At the end of six months, I was almost ready to close the deal. I had negotiated the price down to $400,000 and had my renovation plans at the ready. Shortly before closing, I went on a final walkthrough of the property with the consultants hired by the owner to bring the environmental report up to date. It was at this point that I began to realize that I could not take their conclusions at face value.

The initial report had cited several areas where the soil was stained with oil, but because there was snow on the ground, the final report just passed over further investigation of the problem. Other questions I had concerning the standing sludge also remained unanswered. The consultants noted that "standing oily liquid" was present in the drain, but accepted the owner's assurance that the drain flowed directly into the municipal sewer system. Frustrated, I decided to hire my own environmental consultant.

After spending just a couple of hours on the phone with a consultant of my own choosing, I began to realize the full potential of the site's problems. Despite pressures from the owner to finalize the deal, I authorized a walkthrough by my own team.

A new Phase 1 report was ordered. It recognized that the green sludge in the sump and trench system might contain cyanide and other metal wastes from previous hazardous operations at the plant. The report also pointed out that leaks in the sump and trench system might have resulted in soil and groundwater contamination. It concluded that "further site investigation is merited to determine appropriate disposal of liquids, sludges, and trench integrity."

In addition to responding to concerns I already had, the report raised several new ones--asbestos in sprayed soundproofing and in pipe and boiler insulation, PCBs in electrical transformers, and possible oil contamination.

Because the assessment was only a Phase 1 audit, the actual presence of contaminants was not confirmed. However, unlike the audit commissioned by the owner, the new report clearly supported the need for further testing before buying the property. I contacted the owners and expressed my concerns.

The age of experience

It may be possible that the environmental problems at the site were manageable; I never had the chance to find out. The owners pressed for a closing and were unwilling to give me time to commission the next stage of environmental testing. The message was clear--buy it now or forget it. As hard as it was to give up my plans, I decided to forget it. Two weeks later, the property was sold to another buyer without further environmental investigation.

Looking back from what I know now, I recognize one important issue. Environmental consultants do not deal with problem identication as we do in the real estate business. When real estate professionals encounter a problem, we identify it and attach a remedy. An environmental consultant, on the other hand, identifies possible problem areas, but usually does not speculate on needed remedies. (I see this as a glitch in the system that should be modified. )

In addition, real estate managers must assess the level of the findings in any report they receive. A preliminary site assessment does not have the depth of investigation that a Phase 1 study has. You should identify which level of the report you are reading, especially if you did not order it.

While the time and funds put into the preliminary work for this project were lost, they were not wasted. I have learned through hard experience that a real estate professional cannot afford to be ignorant of the full range and implications of environmental hazards. Commissioning a Phase 1 audit should be one of the first steps a potential buyer takes, not one of the last. Otherwise all the work on renovation plans and market strategies may be wasted.

This does not mean that buying a contaminated property is always a bad decision. But the decision must be based on a knowledge of the liabilities and potential costs involved.

In real estate, we are accustomed to looking for the opportunities in a deal, but if we unknowingly purchase a contaminated property, the liabilities may far outweigh the opportunities. I learned that lesson the hard way; I hope this article has shown you the need for all property managers to become more aware of the environmental issues connected with the properties they manage.

Daniel A. Langner, CPM[R] is president of Langner, Inc., a Northbrook, Illinois, firm specializing in restoring and revitalizing commercial investment properties.

Mr. Langner is a member of the IREM national faculty, has served as course board director for Course 400 and Series 500, and has been chairperson of IREM's Membership Qualifications Courses Committee and Education Sessions Committee. He also has served as president of the Chicago Chapter of IREM and is a past president of the Apartment Building Owners and Managers Association of Chicago.

Site Inspection Checklist

Because of his personal need for practical answers to environmental questions, Mr. Langner is an associate with Environmental Tank Company of Chicago.

Record observations regarding the following items:

* Asbestos (pipe insulation, boiler insulation, ceiling or wall tiles, etc.)

* Underground storage tanks (note the surface conditions around tank locations)

* Former. or current, waste disposal areas

* Drum handling and storage practices

* Wastewater treatment equipment and operations

* General plant practices and operations

* Air emissions (visible particulates or observed odors)

* Signs of stressed vegetation

* Presence of dikes around above-ground storage

* Any unusual staining around drains or shipping/receiving areas

* The type of adjoining properties from a standpoint of potential environmental impact

- Howard M Feintuch. Ph. D Director of Technology and Engineenng, Fester Wheeler Enviresponse. inc

Interviews with the Plant Engineer or Other Site Employees

About these types of information and obtain copies whenever possible:

* Have any wastewater permits or air permits and associated reports been filed with the city, publicly owned treatment works, or state agencies?

* Are there any current, former, or pending Resource Conservation and Recovery Act (RCRA) permits?

* Is ground water monitoring data available for wells at or near the site?

* What are solid and/or hazardous waste disposal practices?

* Have there been any violations, citations, or unauthorized releases of materials from the site?

* Was asbestos used at the site? Has it been removed?

* Are there underground storage tanks? Have they been registered with the appropriate state agency? Have there been indications or reports of leakage?

* Were polychlorinated bipheny (PCB)-filled transformers or capacitors ever used at the site? Have such PCBs been removed from the units, or have the units been rep aced?

* Are the material safety data sheets available?

--Howard M. Feintuch, Ph.D.

City, County, State, or Federal Records

Obtain information on the following items: * Historical usage--check old aerial photographs (local mapping companies or Corps of Engineers) * Sewer and drainage--check facility and city maps and records * POTW discharge permits--check with the city or county * National Pollution Discharge Elimination System--check with the state EPA * Underground storage tanks--check with appropriate state authority or, possibly, local fire department * RCRA/Comprehensive Environmental Response, Compensation and Liability Act-- check with state or federal EPA * Violations, citations, or unauthorized environmental releases (CERCLA)-- check with the state EPA * Air quality permits--check with the state EPA * Parcel ownership--verify with the county assessor * Reported problems--check with the county to determine whether or not there have been any reported cases of ration, groundwater contamination, or

drinking water contamination within a five-mile radius of the site --Howard M. Feintuch. PhD
COPYRIGHT 1992 National Association of Realtors
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Title Annotation:environmental liabilities from contaminated property
Author:Langer, Daniel A.
Publication:Journal of Property Management
Date:May 1, 1992
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