Strategies for Selling Brownfield Properties

16 Jul Strategies for Selling Brownfield Properties

When buying and selling properties, does your return on investment matter? If so, ESA’s strategies may help improve your bottom line.

Every sale or purchase of industrial and commercial real estate addresses environmental issues, and savvy sellers and buyers use environmental issues to leverage their deals. The leverage becomes especially profound when the other party is not represented by professionals with the same degree of environmental savvy. And you might be surprised to know how often that happens.

In this article, the first of a two-part series, ESA discusses the profound advantages that exist on the sell-side of a deal. The second part will provide strategies tailored for buyers.

The key to leveraging environmental issues is to identify them early in the sales process. Unfortunately, people often speak with ESA late in the process, thus forfeiting the opportunity to exercise some of ESA’s more creative ideas. Buyers and sellers retain brokers and real estate attorneys long before they ever think of speaking with an environmental consultant. But an environmental consultant should be an integral part of your team from the start of the process.

Your Typical Real Estate Team

Almost all buyers and sellers of real estate retain a broker and a real estate attorney. Brokers know how to identify properties and potential buyers. They are experts in the art of establishing a sales price consistent with market conditions, and they know how to best present and market your property. They understand how to effectively negotiate with potential buyers, and they know the various sources of funding. Brokers make deals happen, and a great broker is indispensable.

Great real estate attorneys know how to craft a contract of sale. Hopefully, they know enough environmental law to protect you with proper language and indemnifications. They know real estate law and even some tax law to be sure you are protected. They also know how to negotiate with other attorneys. But only specialized environmental attorneys truly understand how to craft contract language that fully protects their clients when dealing with properties with serious environmental issues, current or former.

Why an Environmental Consultant Should be Part of Your Real Estate Team

Do you know the environmental status of your property? Are there environmental impacts? If the answer is yes, how many impacts exist and what is their severity? If there are no impacts, how did you come to this conclusion? Are you certain? And are you certain there were no former impacts to the property? To answer these questions, your environmental consultant must perform due diligence. The findings from the due diligence are the basis from which your consultant will formulate strategies. And those strategies differ markedly depending on whether you are selling or buying.

The Secret to Optimizing Your Sale Price

You already know the secret; it’s common knowledge. Yet, despite that fact, exceedingly few people pursue it. And here it is: address your environmental issues prior to listing your property. So why do so few people follow this simple and sage advice? The answer is fear. But that fear is often misplaced. Environmental compliance is like being on a one-way street. You may not like being there, and you may want to get off the street, but you must proceed down this street to reach your destination; there is no other choice. Instead, convert that fear into action, and that action will enhance your bottom line.

Most people, when selling their private homes, do all they can to ensure that the home shows well. They fix, clean, and stage their homes to facilitate the sale and ensure the highest sale price. They do this because it works.

But environmental issues on industrial and commercial properties can be very costly, far exceeding the typical costs homeowners bear to be environmentally compliant. However, it’s a case of “pay me now or pay me later.” Someone is going to have pay these costs. In most instances, it is better for the property owner to control the environmental process and present for sale an environmentally compliant property. Here’s why that is true:

1. The due diligence process is thorough. Property owners may want to hide environmental issues from a prospective purchaser, but the odds are excellent that the buyer’s environmental consultant will identify them.
2. Just because sign-off from state regulators was secured many years ago doesn’t mean the sign-off is still valid. This is because the environmental regulations may have changed. Examine and address the status of environmental projects performed and closed many years ago.
3. Doing the work in advance allows the property owner to identify Other People’s Money (OPM) to pay for their environmental work. OPM takes several forms that depend, in part, on the nature and extent of the impacts. Succinctly, OPM can be accessed via insurance policies issued on or before 1986, contemporary insurance policies (depending upon several factors), state grants or loans, and property tax appeals. (for more information on OPM, click here).
4. If you conflate the environmental compliance process with the sale process, two things can happen. The first is that the buyer may haggle over the sale price, using environmental issues as leverage. The second is that you may spend a considerable amount of money on professional services that would otherwise be rendered unnecessary. Specifically, you may incur additional legal and consulting fees for meetings, document review, conference calls, etc. that would otherwise not be needed. ESA has seen this happen repeatedly.
5. You can control seasonality. Sometimes excavation and disposal of impacted soil needs to be done. It is almost always better to do this during the seasonal dry period. ESA has saved our clients large sums of money by using this strategy.
6. Environmental compliance takes time, and excessive time is death for deals. Despite the regulatory changes that make environmental compliance a faster process, sometimes it just takes a lot of time. If you do environmental work during the deal process, you could lose the deal due to time constraints. If you do the environmental work in advance of the deal, you will automatically hasten the transaction time.

In summary, the environmental work is going to have to be done. So, do it on your time and at your pace and after exploring the possible sources of OPM. Do it without having to incur extraneous professional fees. Do it so you maximize the sale price. Do it to hasten the actual sales process. Finally, do it so you walk out with the maximum amount of money possible.