Non-Standard Property Red Flags

Fri Jun 29, 2018 at 11:10 AM

When purchasing a commercial property, there are several risks to manage, from the market, financing, and tenants, to the physical property itself.

One of those risks is environmental contaminants, which can be costly to clean up and can carry serious penalties if not properly remediated. While certain activities such as the manufacturing of chemicals raise obvious red flags regarding possible contamination, there are several inconspicuous, or non-standard, conditions that indicate possible contamination. This paper will review the purposes of environmental due diligence and six of those non-standard red flag conditions.


Laws, Liability, and Due Diligence

In 1980, Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as Superfund, as a measure to clean up hazardous waste sites that have been abandoned or uncontrolled in addition to accidents or other releases of contaminants. The law also established measures to determine liable parties, or potentially responsible parties (PRPs), for the cleanup of contaminated sites. Four classes of PRPs may be liable for contamination at a Superfund site: 

  1. The current owner or operator of the site
  2. The owner or operator of a site at the time that disposal of a hazardous substance, pollutant, or contaminant occurred
  3. A person who arranged for the disposal of a hazardous substance, pollutant, or contaminant at a site
  4. A person who transported a hazardous substance, pollutant, or contaminant to a site, who also has selected that site for the disposal of the hazardous substances, pollutants, or contaminants[i]

This measure is why environmental due diligence and Phase I Environmental Site Assessments (ESAs) have become an essential part of the acquisition process. Notice, for instance, that the first PRP class suggests that a current owner or operator of an already-contaminated site could be just as liable as the owner or operator that caused the contamination. As part of CERCLA regulation, if someone purchases a property without conducting an investigation in accordance with CERCLA standards and later discovers it is contaminated, they are potentially responsible for the cleanup and the effects of the contamination. A Phase I ESA, when performed according to ASTM standards, can offer certain protections to the purchaser if contamination is discovered to be associated with a property.


Phase I Environmental Site Assessments

The main goal of a Phase I ESA is to identify or rule out the presence of recognized environmental conditions (RECs). An REC is defined by the ASTM as “the presence or likely presence of any hazardous substances or petroleum products in, on, or at a property:

  1. Due to any release to the environment
  2. Under conditions indicative of a release to the environment
  3. Under conditions that pose a material threat of a future release to the environment”

A site assessor will undertake several different approaches to determining the above, including historical research into the property use, interviews with the property owner, on-site manager, neighbors, former owners/operators of subject property or adjacent sites, regulatory database review of properties within ½ or 1 mile radii for regulatory concerns (spills, leaking tanks, landfills, etc.), municipal data/agency research through the building, fire, and environmental health departments, and physical site inspection. There are several of conditions that may indicate the presence of hazardous substances. Below are six non-standard conditions that may raise red flags.


1. Underground Storage Tanks (USTs)

USTs, tanks that have at least 10 percent of their combined volume underground, are typically found in filling stations, mobile home parks, and industrial sites. USTs are used to store petroleum products (gasoline, diesel, heating oil, etc.) or other flammable materials underground. They are usually a recognized environmental issue and are required to be registered with the applicable state agency, but can easily be missed and are often only discovered when included in historical reports or during the excavation phase of construction projects. In apartment complexes, retirement homes, older healthcare facilities, and mobile home parks, there can be multiple smaller tanks scattered around the property.

The regulations for USTs vary from state to state, but many have regulations that require the removal of a UST if it has not been utilized in a one year period, and a leaking UST must be removed among other remedial actions. USTs pose a risk of contamination, which could be an issue for a potential buyer or the lender. This will come up every time the property is bought, sold, refinanced, etc.

USTSoil and water testing in the area of the UST can help determine if it is leaking. A leaking UST is an environmental encumbrance and must be reported within 24 hours. Immediate response actions are taken to contain the leak. Because they contain volatile organic compounds (VOCs), there can be concerns about vapors causing indoor air quality or explosive hazards. Other important considerations with leaking USTs are potential impacts to soil, groundwater, and adjacent properties, especially ifear sensitive receptors (surface water, drinking water supplies, or wetlands). The property owner could be liable for these impacts.

A Phase I ESA can help identify the presence of USTs on a property, and if found, an environmental consultant can provide guidance on next steps, including further investigation of the USTs.


2. Cemeteries

Cemeteries are not often thought of as sources of environmental contamination, but research has concluded that over time minerals and chemicals used in burials, specifically in buried coffins and embalmed bodies, can contaminate surrounding soils and groundwater and become a potential health risk.

Coffins are often made with steel, or are adorned with metal handles or ornamentals which eventually corrode, and if they are made of wood, they likely contain the preservative CCA, a compound containing arsenic, which will also be released over time. The protective finishes sprayed on coffin exteriors contain xylene, and the paints contain mineral compounds that sometimes contain heavy metals like lead, copper, arsenic, and chromium. All of these metals are listed by OSHA as toxic metals that are hazardous to humans.[ii] One controlled study of metal concentrations in a cemetery compared to offsite resulted in ratios exceeding 8:1, specifically of minerals used in coffin construction.[iii]

The chemicals used in the embalming process are also highly toxic. Throughout the 17th century, arsenic was used in embalming, especially during the Civil War, until it was banned from use in 1910. Arsenic does not bio-remediate, or break down, so long after human remains are gone, arsenic can still persist in the soil and make its way into groundwater. Formaldehyde, a known carcinogen, is the main ingredient in embalming fluids today. The EPA regulates it as a hazardous waste; however, each burial of an embalmed body will contain approximately three-gallons of formaldehyde.[iv] The environmental impact of this has not been widely studied, but it stands to be a potential hazard, especially if it can migrate to drinking water sources.

A Phase I ESA can help identify if a property is located in close proximity to a cemetery, or has been a cemetery site in the past. If determined to be a potential hazard, a Phase II investigation can help determine the presence of contaminants. Groundwater testing and the testing of wells (potable or irrigation) may be recommended, especially if there are conditions conducive to the spread of contaminants, such as permeable soils, ground slope or shallow aquifers. Extra consideration should be given to potential arsenic contamination if the cemetery was in use prior to 1910.

Cemetary[v]


3. Septic Tanks in Auto Repairs, Wood Manufacturing & Funeral Homes

In rural areas, it’s common for commercial properties to have septic tanks, which can be a concern if harmful chemicals are used in operations. Auto repairs, wood manufacturers, and funeral homes are some industries which raise red flags when they have associated septic systems.

The chemicals used by these industries may, intentionally or not, be drained into septic tanks, which can result in site contamination two different ways. One way is from the emptying of the holding tank into a drainage or leach field. Once in a drainage field, the chemicals are exposed to the soil and can migrate into groundwater. Even if the tank is pumped, contamination can occur if the tank is impaired, which is more likely since they are not meant to hold corrosive chemicals. The chemicals can then leak into soil and pose a threat to groundwater.

Auto repair shops and wood manufacturers create a variety of hazardous wastes including petroleum products, degreasing solvents, battery electrolytes, heavy metals, paints and thinners.[vi] It was once common practice to dump these hazardous wastes down drains, but even the systems designed to dispose of them, underground injection control wells (UICs), were determined potential sources of groundwater contamination and banned by the EPA for use in the auto industry as recently as 2000.[vii] Evidence has also shown that just the washing of chemicals from hands or tools over the years can result in a harmful buildup of contaminants.[viii]

Funeral homes use formaldehyde, methanol, ethylene glycol, and sometimes chlorinated solvents for embalming and disinfecting. These chemicals are allowed to be drained to sewage or septic tanks, and until the EPA banned the practice in 2005, the septic tanks were also allowed to be emptied into drainage fields.[ix]

While the EPA has stepped in to curb contamination by commercial use of septic systems, it is possible that chemicals were introduced to the site over decades. One of the common indicators field assessors look for are large patches of browned out vegetation over the septic tank or drainage field, signaling the presence of chemicals. Research into the property’s historic use is another tool used in Phase I ESAs to identify a possible REC.


4. Shooting Ranges

Soil Surface TestsThe impact of shooting ranges on public health and the environment has had little attention despite numerous scientific publications identifying their hazards, including an EPA report in 2005. The primary concern with shooting ranges is lead contamination. Lead bullets are still used today, and one of the results of the continued use of lead bullets/shot is shooting ranges that contain thousands of pounds of discharged lead bullets and shot (25,000 – 50,000 on average, and in some cases 250 tons).

Lead has long been known to be a toxic metal with major impacts on human health and wildlife. There are a few ways lead is introduced to the environment at shooting ranges besides being deposited in the soil. Lead oxidizes when exposed to air and dissolves when exposed to acidic water or soil; lead bullets, bullet particles, or dissolved lead can be moved by storm water runoff; and dissolved lead can migrate through soils to groundwater.

The consensus is that lead contamination is a serious hazard, but even a few decades ago, the topic of recreational gun use was highly politicized, and laws, court rulings, and EPA guidelines have consequently been careful to not impose too-restrictive measures on shooting ranges. While the EPA published “Best Management Practices for Lead at Outdoor Shooting Ranges” in 2005 to reduce lead contamination, management practices of shooting ranges remain largely inconsistent and unregulated.

According to the guidelines, “lead shot is not considered a hazardous waste subject to RCRA law (Resource Conservation and Recovery Act) at the time it is discharged from a firearm because it is used for its intended purpose. As such, shooting lead shot (or bullets) is not regulated nor is a RCRA permit required to operate a shooting range. However, spent lead shot (or bullets), left in the environment (abandoned) is subject to the broader definition of solid waste written by Congress.”[x] So, while shooting ranges are in operation, the lead contamination does not fall under any regulation. Once the shooting range is closed or no longer in use, then it becomes subject to regulation.

For land owners or potential buyers, that means a major cleanup and/or potential liability for any adverse environmental or public health effects as a result of the site contamination. If there’s any indication that a site may have been a shooting range (even a non-commercial one) it is a good idea to make certain that lead contaminants aren’t still lingering on the property. If the presence of a historic shooting range is uncertain, a Phase I ESA can help identify the likelihood or certainty of the land use.


5. Railfields

One hundred years after the first railroad built in the US in 1815, the rail network had grown to 254,000 miles across the country. Within fifty years, “the miles maintained by the entire rail system had decreased by 50 percent, leaving an extensive legacy of underutilized, contaminated, and sometimes abandoned rail properties also known as railfields” (rail tracks, rights-of-way, rail depots, industrial areas, and other support facilities).[xi]

The concern with railfields is residual contamination along rail corridors and contamination associated with industrial uses alongside it. Common contaminants include:

  • Railroad ties, usually treated with chemicals such as creosote
  • Coal ash and cinder containing lead and arsenic
  • Spilled or leaked liquids such as oil, gasoline, cleaning solvents, etc.
  • Herbicides
  • Fossil fuel combustion products (PAHs)
  • Metals[xii]

These contaminants can make their way to the immediate and surrounding grounds from a variety of activities. Spills from train engines, derailments, leaks of hazardous cargo (chemicals, fuel, etc.), and herbicides (historically containing arsenic) used for weed control on railbeds are some examples. Railroad ties (wooden planks which support the rails) can be found at active and inactive railfields and tracks and often contain creosote, a probable carcinogen, and sometimes chromated copper arsenate, a highly toxic metal alloy, both used as wood preservatives.

Many railroads have since been dismantled, but evidence collected from the physical site and research of municipal documents through a Phase I ESA can help identify their historic presence and may also reveal the type of cargo on the rail line and any known accidents or spills.


6. Dry Cleaners, Martinizing, Laundries, and Coin-Op Laundromats

Dry cleaners are well-known to have major environmental contamination issues, so they don’t exactly fit the ‘non-standard’ thread of this paper. However, there are some ‘non-standard’ indicators of the historic presence of dry cleaners that could easily be overlooked.

When dry cleaning was first introduced to the US, the solvents were extremely flammable. As a safety measure, dry cleaners had store fronts for customer drop-offs, and from there the clothing would be sent to an off-site factory where they would be cleaned. This adds a level of confusion regarding historic dry cleaners and whether cleaning was performed on site. Furthermore, the off-site factories may not have names reflecting the dry cleaning process.

Additional challenges in determining whether historic dry cleaners are an issue for the site are that they typically change ownership every 3-5 years, and some sites listed in historic records as Martinizing (a brand name), laundries, laundromats, and even coin-op laundromats may have had on-site dry cleaning.

To determine if a site has had dry cleaning, an assessor will perform a Phase I ESA by looking for equipment (machine/drums) or staining, reviewing paperwork to determine if the past industries were a generator of hazardous waste, and performing in-depth reviews of historical records and city directories, among other methods.


Benefits of a Phase I ESA

As previously mentioned, the major concern with RECs for business ventures is the potential liability for the effects of contamination on the environment and/or public health – whether the current owner is the cause of the contamination or not – and cleanups can be extremely costly. Spending on due diligence to fully understand these issues is money well spent when considering the mitigation of legal risk and maximization of value as a result.

Engaging an environmental consulting firm to perform a Phase I ESA is the first step in determining potential site contamination. Clients can often be key players in the Phase I process by engaging with previous owners and others who may have knowledge of the site not found in public records. If a possible REC is found, the consultant can work with the interested party (whether a lender, investor, buyer or owner) to determine the best course of action to fit their business needs, including further investigation through a Phase II ESA.


EBI Consulting

Environmental Site Assessments are a core service of EBI Consulting. Our nationwide team of scientists and engineers perform ESAs daily on all property types and offer our clients access to an extensive knowledge base while delivering a high level of professionalism. We ensure that our clients fully understand the risks associated with their properties to inform sound business and financial decisions.

For more information on ESAs or EBI Consulting’s due diligence services, please visit our website or contact us.


About the Authors

Beth Spatz, Operations Manager, Midwest Region

Ms. Spatz has over 20 years of experience in the engineering and environmental, health and safety fields. She has successfully completed hundreds of project assignments pertaining to property transaction due diligence site assessments including: Transaction Screens; Phase I Environmental Site Assessments; NEPA assessments; and peer report reviews.

At EBI, Ms. Spatz specializes in facilitating real estate transactions, specifically reviewing real estate and telecommunication projects, and providing project coordination and portfolio management.

Michele Perkins, Program Manager, Real Estate Due Diligence

Ms. Perkins is a Senior Scientist at EBI Consulting with over 15 years of experience in the environmental consulting industry. Ms. Perkins specializes in Phase I Environmental Site Assessments, subsurface investigations and remediation activities, NEPA assessments, and limited compliance audits. She also completes radon, lead, asbestos, moisture intrusion, and mold sampling assessments.

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[i] CERCLA section 107(a)(1-4)

[ii] https://www.osha.gov/SLTC/metalsheavy/

[iii] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3315260/#B1-ijerph-09-00511

[iv] https://www.utne.com/environment/arsenic-contamination-ze0z1306zpit

[v] Graphic- Silva, R.W.C. & Malagutti Filho, W. Environ Earth Sci (2012) 66: 1371. https://doi.org/10.1007/s12665-011-1347-7

[vi] https://www3.epa.gov/region1/eco/drinkwater/pdfs/biz_source_protect/FINALchapter5.pdf

[vii] https://www3.epa.gov/region1/eco/drinkwater/pdfs/biz_source_protect/FINALchapter5.pdf

[viii] http://www.environmental-law.net/wp-content/uploads/2011/09/Env-Issues-in-Bus-Trans-CLE-03.pdf

[ix]  http://www.epa.gov/oecaerth/resources/reports/endofyear/eoy2007/2007cahighlights.html#funeral

[x] https://www.epa.gov/sites/production/files/documents/epa_bmp.pdf

[xi] https://www.epa.gov/sites/production/files/2015-09/documents/05_railfields.pdf

[xii] https://www.railstotrails.org/build-trails/trail-building-toolbox/acquisition/environmental-contaminants/