Keeping Your Transaction on Track: Site Assessments and Cost Recovery

Environmental liability has always been an important factor to consider when calculating your risk in entering into a commercial real estate transaction. With environmental regulations changing, and in some cases becoming more stringent, knowing the full scope of your liability if there is contamination discovered onsite is of the utmost importance. We asked Partner Engineering and Science’s Jerry Ostrander and Eric Grille, Esq. of Davis Environmental Law to comment on questions we receive about site assessments and insurance recovery and how they may be able to save potentially large out of pocket expenses to clean up contamination at your potential site.

Q. I currently own a property that has confirmed contamination onsite. Where do I start?

As the owner of a property that is potentially contaminated based on the findings of a Phase I Environmental Site Assessment (ESA) and confirmed through a Phase II ESA, you may be required to remediate the site before it can be redeveloped or used for certain purposes.  Appropriate evaluation and planning is critical to successful real estate transactions and redevelopment.

Your first step in the process is to assemble a team of highly qualified professionals to assess whether contamination actually exists and to evaluate the potential costs, remedial options, legal liabilities and legal options associated with the site.  An experienced environmental consultant can develop a remediation cost estimate that will give you an accurate picture of the total cost of the actual cleanup and provide guidance regarding the regulations that you will have to adhere to.  Further, experienced environmental legal counsel should assess legal options and possible legal remedies to help the project succeed. In certain instances, successful projects could include recovering costs from responsible parties or historic insurance policies.  Each client and site is different and may have a range of potential scenarios and associated costs for cleanup.

Depending on the extent/type of contamination, site remediation costs could be considerable enough to abandon the project all together. Alternate funding streams may literally save your project.

Q. I have my remedial cost estimate and now know what it will cost to clean my property to a level acceptable by local, state and federal regulations. How can I avoid putting such a huge amount of money out of pocket?

RECs (Recognized Environmental Conditions) in the form of known contamination or potential discharge are a fact of life, especially in New Jersey and generally in the Northeast region of the United States.

As an owner or lender there are a few things that you can do to try to avoid spending the entirety of the clean-up costs out of pocket. In some cases, there are State and federal government loans and grants available.

If you are a lender, you should be aware of the potential liability associated with the site, as well as safe harbors under environmental laws, such as the New Jersey Spill Compensation and Control Act.  As a practical matter for lenders, a secured interest in properties with environmental contamination may not be desirable.  And for owners of the site looking to refinance or sell, environmental contamination may stifle your transaction.  Being able to promptly assess cleanup costs and potential cost recovery actions can be a valuable asset to you (and the lender) in getting the transaction on track and moving forward.

Q. What type of insurance recovery is possible?

Insurance recovery is possible in many circumstances from several types of historic policies that may have been taken out on a specific property. What some buyers and sellers may not know is that insurance policies purchased during the time of a previous use on the property, or even during a prior owner’s use, may still provide coverage today. For example, if you are purchasing or selling a contaminated property that historically was a manufacturing plant, or had other prior commercial or industrial uses, but stopped operating as such many years ago, there is a possibility that those initial policies can be triggered to provide funds for site cleanup.  Even in situations where the commercial or industrial use is ongoing, or there wasn’t commercial or industrial use, historic policies issued may be triggered as a source of funds. Along with your environmental consultant’s evaluation of the contamination at a site, a skilled environmental attorney can evaluate the site ownership and contaminant history to see if any previous policies can be a potential source of cost recovery for a site currently being purchased, sold or redeveloped.

Q.When can insurance be used?

Insurance can be a valuable source of funding to clean up a site that is being sold, newly purchased or redeveloped as well as providing funds potentially needed to defend against or respond to environmental claims. But, once contamination is identified, prompt action should be taken because there is a potential to lose certain rights or claims. Each site and potential claim is unique and facts need to be evaluated to assess potential insurance claims.

Remediation can be costly-the presence of contamination on any property can complicate, or even dissolve, a potential real estate transaction. If the potential for contamination is identified and remediation may be necessary, Insurance Recovery should be a strong consideration. Engaging an experienced professional environmental consultant and environmental attorney is your best first step in any real estate transaction. Once your environmental consultant has determined contamination is present, your attorney can look into the possibility of insurance recovery that can either partially or fully fund the cost of cleanup or claims against the property, and even help to facilitate your environmental consultant’s implementation of remedial options.