Environmental Property Audits Reduce Liability for Real Property Transactions

By GEORGE F. JAMISON, P.E. and JOAN C. FREITAG Hanson Engineers, Incorporated°

Municipal officials are increasingly concerned about evolving state and federal regulations regarding environmental liability of properties being financed or transferred. As a result of the new risks, more and more of those involved in real property transactions are requiring environmental property audits before acquiring or selling property.

Through the 1980 Comprehensive Environment Response Compensations and Liability Act (CERCLA) or Superfund Act and the 1986 Superfund Amendment and Reauthorization Act (SARA), property owners and operators have broad environmental liability. The Securities and Exchange Commission is moving towards full disclosure of potential environmental liability. And, in Illinois, the Responsible Property Transfer Act has increased the obligation of sellers of some types of real estate to reveal environmental data.

All buyers, sellers and operators can be liable for contamination response, remedy costs, and possible civil penalties. But environmental contamination costs can go far beyond these to include personal injuries, environmental damage, and possible criminal sanctions for willful acts, omissions, or repeated violations.

Municipal officials often require environmental audits when acquiring or selling real property, especially if oil-based products, chemicals or hazardous materials have been used or stored at the site.

Do You Need An Environmental Audit?

Expensive litigation, cleanup costs, regulatory enforcement actions and loss of resale value can all be avoided through a comprehensive property audit. Environmental property audits occur before acquisition, financing, or transfer of a property so the client can fully investigate its history, locate any potential contamination sources, and quantify their impact on the site and on surrounding areas.

Environmental engineers conduct environmental property audits to determine if a site is impacted by hazardous substances. Hazardous substances include petroleum products, the residues of chemical or other manufacturing processes, toxins, and so on. A site usually contains such materials because of activities conducted there, but sometimes hazardous materials are at a site because of "dumping", or subterranean (such as ground water) migration of contaminants.

Insurers don't offer protection from this risk since contamination problems can be significant and unpredictable. Thus, no matter what type of contaminants are found and no matter how they came to the site, their presence can create a huge financial risk for the owners. Consulting engineers who perform environmental property audits provide a report which offers an opinion of whether environmental impairment exists. The engineers make recommendations to clients, who then evaluate their course of action, based on the extent of risk they will accept. A comprehensive environmental property audit reduces the risk associated with site acquisition.

Procedures For An Environmental Property Audit

Most environmental engineering firms apply a logical phased process to an environmental property audit. Phase I is the screening of the property, including a detailed review of historical uses of the site. We find out what Federal and State environmental permits were applied for and received throughout the history of ownership of the property. Governmental enforcement actions for violations of applicable Federal, State or local environmental laws or regulations are investigated. We also search for published information on the general area such as geologic maps and reports, site maps, environmental monitoring data, and other information.

We make observations on-site with a team including environmental and technical personnel. We view and photograph features, observe surface water, and conduct other activities to reveal evidence of hazardous substances.

The property is rated as to the potential for environmental damage. If it has a low risk rating, the firm concludes its services with a written report. Most property audits end at this point.

If the property has a moderate or high potential risk, it is either eliminated from further consideration by the client, or it becomes a candidate for more detailed investigation to further define the risks. The client decides whether to continue the environmental property audit usually in consultation with legal counsel, weighing the value of the property.

°Mr. Jamison is Vice President in charge of the Environmental/Waste Management department and Mrs. Freitag is Marketing Coordinator at Hanson Engineers Incorporated. The line is multidisciplinary with extensive national experience and expertise in environmental property audits. Hanson Engineers has offices in Springfield, Rockford, and Peoria, IL, and performs environmental property audits for property owners, investors and lenders.

Page 26 / Illinois Municipal Review / December 1990

Most environmental property audits do not go beyond Phase I. If the report contains information about contamination of the site, the lender or investor will often opt not to be involved in the property transaction.

Phase II - Site Investigation

If the client elects to continue the audit, the next step is Phase II. This includes the site investigation with collection and analysis of soil, soil gas, and water samples, as well as geophysical surveys.

Based on these, the client decides what the next step will be. It may be necessary to initiate a site clean-up. However, in some instances, the Phase II work may reveal a much cleaner site than anticipated from Phase I results.

Phase III - Remedial Investigation

The Phase III portion of the audit is initiated if remedial action (site clean-up) is required, and if costs need to be defined. We also provide a feasibility study with the remedial investigation.

It's possible that Phase I or Phase II work may identify site contamination problems that require immediate emergency remedial actions. Such action is required in the case of imminent public danger or potential catastrophic environmental release. We immediately notify the client of any such discoveries.

Anyone who buys or owns property can be sued if their property is contaminated. This exposes owners or operators to liability far exceeding the property's value. Liability arising from toxic or hazardous contamination and its concurrent costs can be mitigated by having your property examined by professionals skilled in determining the potential for impairment. An environmental audit is an inexpensive tool- for minimizing costly pollution responsibility.

December 1990 / Illinois Municipal Review / Page 27