Gas Stations and Regulatory Compliance: Too Much Information?

Individual states and municipalities continue to adopt laws, regulations and even guidance documents that may or may not be more stringent than the federal regulations in regards to the operation and maintenance of underground storage tanks (USTs).    Lenders are often faced with too little information on the UST system or bombarded with a lot of documentation that could be pertinent in the decision making process when evaluating risks associated with gas stations.  Finding the balance between enough and too much information is key. Terms like “ Regulatory Compliance” or “in Compliance” are used by owners, operators, state agencies and even environmental professionals (EP) to describe the status of the UST system, but in each situation, Compliance can mean something different depending on the point of view. Regulatory compliance, by definition, may vary from state to state and can be as simple as the UST owner paying fees for proper registration of the UST system or as comprehensive as a regulatory authority completing a thorough Compliance Inspection.   Phase I ESAs and Compliance Audits A Phase I Environmental Site Assessment is the gold standard for evaluating the environmental liability associated with a real estate asset.  The Phase I ESA is an important in due diligence for gas stations as it looks at the full history of the property, which can often include multiple generations of USTs in different locations at a property.  These and other factors all contribute to the overall environmental risk of the site.   A Phase I ESA is not a compliance audit, but often for gas station sites clients will request that the Phase I include a review certain “compliance” components such as the release detection method and recent records of equipment tightness tests – these records are very helpful in evaluating the risk associated with USTs.  Other factors such as age of the UST system, installation and repair records, and upgrade records also can provide additional information that could be pertinent in the decision making process.     The scope of work should be discussed with your consultant up front to ensure they are performing the scope of work you are comfortable with – often this can be accommodated at little to no extra cost.  There may be many other compliance requirements other than these items depending on the state or local requirements, so if a full compliance audit is requested it is important for the EP to be knowledgeable of the regulatory statutes that precipitate an “In Compliance” status by the relevant governing body. Compliance Audits can be much more comprehensive than the level of review done during the Phase I ESA.     While a Phase I ESA is often sufficient to satisfy lender requirements and a compliance audit can provide additional comfort regarding the risk of lending on a gas station, even a site with a UST system that is currently in compliance can have a risk of being contaminated.  The only way to confidently determine the presence or absence of contamination is to conduct subsurface tests.   Phase II ESA – to be sure, to be sure Phase II ESAs involve soil, soil-gas and/or groundwater testing and can provide more concrete information about the presence or absence of contamination at a property, which can help lenders make better-informed decisions and increase the comfort level of lending on this risky property type.   Lenders have different risk tolerances when making business decisions regarding gas stations, and certain lenders (for example the SBA) may require subsurface tests (groundwater, soil and soil vapor) to be conducted to qualify for financing, based on the environmental professional’s recommendations during the Phase I ESA. Conducting a Phase II ESA is also advisable for property buyers seeking exemption from CERCLA liability for cleanup costs, or those who want to establish a baseline of any pre-existing contamination.    As you can see, “regulatory compliance” can mean different things and the lender, with the help of the EP, will need to evaluate when enough information is enough.