When expanding an existing business or starting a new one, it is rare to locate on a property that did not have a previous use. In most areas of the country, it is also not uncommon for the property to have environmental issues that can create liability for both prior and current owners.

Although in the vast majority of circumstances these environmental risks are not so severe as to prevent someone from purchasing the property, it is critical that all owners conduct proper due diligence prior to acquiring a new location.  Within the field of environmental risk management, this is referred to as conducting All Appropriate Inquiry (AAI).

AAI is not only a prudent risk management tool to manage a business and the financial risk associated with a transaction, but it is also critical to minimize regulatory risk and establish defense protection against potential lawsuits.

This due diligence should go beyond an understanding of the historical environmental conditions at the site and also consider any risks that may be imposed via contract or regulatory/governmental mandate.

Look Closely at What You Buy

Take for example a former metal stamping facility with over two million square feet of building space situated on 266 acres that operated continually from the mid 50’s to 2010 when to facility was closed. The property is located close to major highway and is viewed as one of the top road infrastructures in the nation.

Various environmental conditions have been indentified at the site through past investigations. Based upon these investigations, a restrictive covenant to limit future use to industrial/commercial and to prohibit onsite groundwater use may be required and $3 million has been set aside for future investigations and potential cleanup.

In order to achieve a No Further Action (NFA) letter from the state, it was necessary to conduct a soil investigation in one area outside of the building; however the area beneath the main building has not been investigated.

Within the real estate community these distressed assets are often referred to as “upside-down properties” since the perceived or actual environmental risk exceeds the commercial value of the property. 

This property is just one of 89 former General Motors properties located in 14 states that the Revitalizing Auto Communities Environmental Response Trust (RACER) has been mandated to sell following the GM bankruptcy and $50 billion taxpayer bailout.

 The trust is tasked not only in selling over 44 million square feet of industrial space it has a broader mission of creating jobs and increasing tax revenue in communities where the plants were located while addressing and remediating the historical environmental liabilities.

For commercial organizations, these RACER properties represent a tremendous opportunity to acquire property in desirable locations to support expansion activities.  However based upon past activities, these properties will present environmental risk exposures that must be addressed and managed as part of the real estate transaction.