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Don’t Let Due Diligence Missteps Tank Your Next Gas Station Purchase

March 19, 2018

Whether you are considering your first gasoline station property purchase or adding to the portfolio of properties you own and operate, it’s important to understand the steps required to ensure environmental compliance. Here, we take on a few of the most common misconceptions about environmental due diligence to help you navigate the process.

“I’ve financed a gas station purchase with this bank before. They know they can trust me to find the right property. I’ll have the property checked out during renovation.”

A strong relationship with your lender is a good thing, but it doesn’t take the place of due diligence. Due diligence is the process of investigating the environmental condition of a property. It begins with the completion of a Phase I Environmental Site Assessment (ESA) to properly assess risk and provide desired protections.   

Potential lenders need to be able to quantify risks and evaluate plans to address issues. Your due diligence helps your lender understand any environmental concerns that might impact the value or use of the property, and whether complying with potential regulatory cleanup mandates might impact your ability to repay their loan.  

“Isn’t disclosing a property’s environmental risks the responsibility of the seller?”

No. As a potential purchaser, due diligence is your responsibility. It’s also good business. In addition to providing needed assurances to your lender, it also provides essential financial and legal protection for you.

A Phase I ESA documents preexisting environmental contamination. If completed prior to purchase, a Phase I ESA that meets the standard known as All Appropriate Inquiry (AAI) qualifies the buyer for innocent landowner protections. These federal and state protections ensure that you will be exempt from the cost of any environmental cleanups or closures after you assume ownership of the property.  

“It’s a gas station. I don’t need a Phase I ESA to know there will be potential contamination issues. Can’t I just skip Phase I and go right to the Phase II ESA?”

Skipping the Phase I ESA exposes you up to considerable potential risk.  For example, assume a Phase I ESA is skipped and a Phase II ESA is completed only at the current location of the underground storage tank (UST) system. This does not take into consideration USTs no longer in use (called orphan USTs) located elsewhere on the property. It also fails to consider whether in the past the station might have offered products and services in addition to gasoline, such as vehicle service. Issues associated with additional operations include waste oil and fuel oil USTs, contamination from hydraulic hoists, and improper sink and floor drain disposal to septic systems no longer in use. 

“If the Phase I ESA report is favorable and the UST system is in good shape, maybe I don’t need a Phase II ESA.”

Phase I and Phase II ESAs each provide essential – and different – information. As a gasoline station owner/operator, you need the protection against regulatory penalties offered by both.

Without a proper Phase II ESA, for instance, problems with the property’s current UST system might go unresolved until detected in a regulatory audit. This could lead to a regulatory shutdown and expensive upgrades, which could drive you out of business. 

The Phase II ESA site investigation also assesses the current concentrations of soil and groundwater contamination and evaluates the risks associated with existing contaminant pathways. For example, properties in urban areas with municipal water are more likely to receive regulatory closure compared to locations in areas with private wells. And contamination that has migrated beyond property boundaries may lead to third party law suits requiring cleanup of offsite contamination.

“The property I’m considering has already had a regulatory closure. I don’t have to worry about additional due diligence.”

It’s common for gasoline stations on the market for sale to have been closed by state or federal authorities based on known contamination issues (called a regulatory closure). Depending on how long ago the closure occurred, this may or may not mean that additional work is necessary. Banks usually require new site investigation to document existing conditions if the previous data is more than five years old. 

Don’t assume that no additional environmental problems have occurred since the closure. For example, even if a gasoline station with a regulatory closure has a newer UST system that meets the EPA’s federal upgrade standards, a new release of contaminants may have occurred. It is not uncommon for Phase II ESAs completed at closed leaking UST sites to reveal high levels of contamination or free product (such as gas floating on the water table), either from a new release or from an unknown source not initially identified.

“Do I really need to hire an environmental consultant? Can’t my architect or contractor evaluate the property?”

A qualified environmental consultant is necessary to ensure the job is done right. In fact, your lender is likely to insist on it, and may provide you with a list of approved consultants. 

When selecting a consultant, make sure they have substantial experience in due diligence related to gasoline station properties.  PM Environmental has more than 25 years of experience in due diligence related to gasoline station properties.

Caveat Emptor – Let the Buyer Beware  

That rule is as wise today as it was in ancient times, and it’s particularly true when evaluating the purchase of a gasoline station property. Each site is different, and each transaction is unique. For your protection as a buyer, all potential sources of contamination need to be assessed in a Phase I ESA, which takes a bit more effort when it involves a gasoline station. To document the nature and extent of existing contamination, a Phase II ESA is equally critical in order to strengthen a legal defense should it ever be needed after taking ownership.   

In short, investing in an expert assessment of the property prior to purchase enhances your ability to secure financing today, to do business on the property tomorrow, and to resell the property down the road.