Strategies for Buying Brownfield Properties

21 Aug Strategies for Buying Brownfield Properties

Buyers (better known as Prospective Purchasers, or “PPs”) of Brownfield properties often identify environmental issues that increase their buying leverage. And ironically, sometimes PPs gain leverage because sellers did not follow the strategy ESA presented in Part 1 of this two-part series. In this, Part 2 of the series, ESA examines the benefits PPs enjoy when contemplating the purchase of an environmentally distressed property.

Prospective Purchasers Get a Liability-Free Look

PPs have two opportunities to get a liability-free look at the property. The first look occurs when the PP conducts due diligence (remember, in New Jersey, the preferred form of due diligence is the preliminary assessment for a Brownfield property, not the Phase I. See this article for more on the topic of due diligence). Upon examining the due diligence report, the PP may feel there is too much uncertainty or risk and, thus, walks away. But other times, the PP is not deterred by the results and wants to know more.

The second look occurs when the PP retains an environmental consultant to perform a Phase II site investigation. This site investigation is done at the PP’s expense and, in New Jersey, the PP is NOT bound by the rules of the Spill Act (N.J.S.A. 58:10-23.11 Spill Compensation and Control Act). That is, they are not deemed the responsible party. Therefore, if the PP’s consultant finds significant environmental impacts, the PP is NOT obligated to tell the seller. Nor is the PP obligated to report their findings to the NJDEP. They can simply walk away from the deal. NOTE: ESA suggests that a Licensed Site Remediation Professional (LSRP) NOT be retained during this assignment because they possess certain reporting obligations that could contravene this strategy.

Buy Down the Sale Price

When the seller fails to remediate their property in advance of a sale, they leave the door open to another avenue by which the PP can negotiate a reduced price. ESA has been on both sides of deals where this strategy has been used. If the seller remediates their property and is issued a Response Action Outcome (RAO) by an LSRP prior to the sale, they will have eliminated one of the most serious, time consuming, and expensive impediments to their sale.

ESA was contracted to do work for the seller of a truck stop in South Jersey. ESA’s price to remediate was $140,000. The buyer offered to indemnify the seller in exchange for reducing the sale price by $500,000, and ESA’s client agreed. We strongly advised our client to reject this offer, guaranteeing our quoted price. But our client took the buyer’s offer because he didn’t want to invest any more time. So, the buyer shaved $500,000 off the sale price (putting at least $350,000 in their own pocket) because the seller painted themselves into a corner by not addressing the impacts in advance of the deal.

Time is on the PP’s Side

Sellers usually want nothing further to do with their former property post-closure. So, if they are going to relinquish remedial control to the new owner, that enables the new owner to exercise time to their benefit. Depending on the nature of the preferred remedial approach, the new owner can often use as much time as they need to effect remediation.

Even though ESA firmly believes that excavation and disposal of impacted soil is almost always the preferred remedial method, there are times when technical remediation methods make more sense. Certain in-situ methods work very well and, when time is not a limiting factor, can confer minimal operation and maintenance costs. For example, let’s assume there is subsurface gasoline contamination beneath a building. ESA could install a low maintenance system, such as a passive, soil vapor extraction/venting system, and allow it to run for an extended period – even several years. It will work slowly and will operate at a nominal cost, making the time that the system operates irrelevant as long as there is hydraulic control over the impacted materials.

In other words, by using time to their advantage, the buyer can remediate the site for far less money than the seller. Please note that the opposite is also true. That is, sellers can use this same benefit to their advantage if they do their cleanup well in advance of the sale.

File a Tax Appeal

If the buyer has bought an impacted property, there is a very real possibility that they can now file a tax appeal using the presence of the impacts to diminish the taxable value of the property. To do this, the buyer needs to retain an attorney that specializes in filing such appeals; they are one of the few legal services that are still performed on a contingency basis.

Summary

Regardless of whether you are selling or buying a property, ESA has strategies to help you. Contact us early in the process so we can bring real value to your bottom line.