06 Nov Cautionary Tales: Due Diligence Gone Wrong
Overview
Throughout its 35 years in business, ESA has rescued many clients who have inherited complex and costly environmental liabilities resulting from inadequate due diligence. Often, these situations arise because the only criteria a client applies in hiring an environmental consultant to do the job is cost. Is it wise to make a due diligence hiring decision based on price alone? If not, what other criteria should prevail? Read on to find out.
Real-Life Lessons Learned
Charter School – Newark, New Jersey
For this project, ESA was originally retained by a property owner to facilitate removal of two underground storage tanks (USTs) identified by another consultant through the use of a simple magnetometer. Knowing the owner’s desire to address all of the site’s environmental issues prior to their goal of selling the property to the tenant who was currently leasing the building on the site, ESA recommended and performed a new Preliminary Assessment (PA) for the client.
Using ground-penetrating radar to execute a more sophisticated geophysical survey, ESA subsequently identified multiple historic areas of concern and confirmed the presence of not only the two previously identified USTs, but also five additional out-of-service USTs that were missed by the prior consultant’s less-precise methods. While no property owner is thrilled with the unexpected costs of environmental work, this client recognized the benefits of addressing the issues up front, rather than waiting for them to rear their ugly head during the sales process or years into the future.
Banking and Commercial Real Estate – Ocean City, New Jersey
A commercial lender recently retained ESA to perform an environmental transaction screen for a refinance deal on a commercial property currently operating as a convenience store and pharmacy. During the screening process, ESA reviewed a prior Phase I report prepared by another consultant that concluded that the property had only operated as a convenience store and pharmacy since the 1980s. The Phase I report showed no other businesses prior to the 1980s, nor were any areas of concern identified.
Contrary to the findings of the prior consultant, ESA’s research revealed that the property had been used commercially dating back to the 1940s, and multiple abandoned USTs and potential areas of concern were identified in connection with a former vehicle maintenance garage located on the property. Crucial details such as these are essential to a lender’s ability to make informed decisions regarding financial transactions.
Subsequently, the property owner retained ESA to perform a Phase II site investigation, which revealed that underlying soil and groundwater were severely impacted from the historic operations. Although the owner caused none of these issues, they were deemed the responsible party and were obligated to pay for the required environmental remediation. While ESA cannot predict the outcome of a due diligence assessment, we use every strategy and application at our command to minimize the cost of unexpected environmental impacts.
Childcare Center – Penns Grove, New Jersey
As part of a planned expansion at an existing childcare center (CCC), ESA was retained to conduct a Preliminary Assessment to fulfill regulatory compliance requirements for updated CCC licensing. The subject property had been licensed by the State of New Jersey for CCC operation since the early 1990s, and the current owner purchased the property based on a 2007 Preliminary Assessment report prepared by another consultant. The 2007 report concluded that historic property operations were limited to light commercial and retail sales. However, the consultant failed to review historic aerial photographs and only performed a limited evaluation utilizing Sanborn Fire Insurance maps. The consultant’s 2007 report concluded that no former or current areas of concern were present that would warrant a Site Investigation. Based on this conclusion, the state issued the CCC license. We think you know what’s coming next…
Upon execution of the requested Preliminary Assessment, ESA discovered that there was a high probability of the presence of historic fill material resulting from the demolition of former commercial buildings at the site. The ensuing Site Investigation of the outdoor play area revealed historic fill-related contaminants at concentrations above remediation standards. Further investigation determined that the impacted soil was widespread and would require extensive remediation. The fact that there is a childcare facility housed on this property rendered the project all the more critical to execute properly. ESA subsequently remediated the property and restored it back to safe, habitable land for children and adults alike.
Criteria for Competent Consultants
If the gauge for hiring a capable environmental consultant should not be based on cost alone, then what other factors should you consider? And what questions should you ask your potential consultant to ensure you’re getting the best balance of benefit to cost possible?
Experience. There’s a reason why long-established companies are still in business.
Who’s doing the work? Only in instances of extraordinarily complex projects will a senior member of the project team do the actual due diligence work, which is typically assigned to junior-level scientists. This is standard and customary procedure. Still, you’ll want to insist that the senior-level manager assigned to your project will oversee the work and guide your project through to completion. This is the key element: the person assigned to manage the junior scientists must be highly competent. Your project manager will scrutinize all data and reports, ensuring that all facets of the assignment have been investigated in accordance with standard environmental industry practices.
Put price into perspective. Let’s assume you are buying an industrial property for $1,000,000 and you find a “bargain” consultant that charges $3,000 for due diligence. Another consultant — one with a long-standing record of exceptional performance and service — charges $4,000. While there’s a mere 0.1% difference in the cost of these consultants compared to your overall $1,000,000 purchase price, there may be a world of difference in the quality of outcome. In other words, the price for due diligence is trivial compared to your overall investment. And, ironically, the downside risk of shoddy performance from a “bargain” consultant can result in financial disaster. Simply put, scrimping on due diligence is a reckless proposition at best.