Factors that Influence Environmental Due Diligence when Buying Gas Stations
This article was originally published in the Winter 2021 edition of the Michigan Petroleum Association/Michigan Association of Convenience Stores (MPAMACS) Marketer Magazine.
Lately, I asked some MPA members about what environmental due diligence they complete when buying gas stations in Michigan. Their answers are interesting based on their experiences and show a variety of approaches to the subject.
I have a lot of experience too, gained the last 30 years of working on these types of projects, to know what the factors that influence the approach should be. The existence of the Michigan Underground Storage Tank Authority (MUSTA) fund has certainly influenced the approach. So too have the seemingly never-ending changes to the requirements to achieve a regulatory closure of a leaking UST (LUST) site. This includes the emergence of the vapor intrusion (VI) pathway and how it has impacted buyers view of environmental risk.
As you might imagine, there are a lot of factors that impact the approach for due diligence such as:
- The age and condition of the UST system
- When the buyer plans on upgrading the system
- The previous environmental history of the site and whether there is documented contamination
- If the property has ever been a regulated LUST site and if the LUST status is currently open
- Whether there has previously been a MUSTA claim.
Buyers want to know the liability risks associated with the site, including:
- How bad the contamination problem is
- Whether the UST system is in compliance and can continue to be operated
- Will the site be eligible for the MUSTA fund and how the presence of existing contamination could impact coverage
- Other potential issues such as problems with a potable water well (i.e., contaminated from bacteria or chemicals) where it could prevent the health department from issuing a license
The environmental due diligence usually starts off with an assessment of the known or suspected environmental issues and the current compliance of the UST system. One MPA member indicated that one of the first things they do is to initiate a Phase I Environmental Site Assessment (ESA) and a compliance assessment of the UST system(s), including a visual inspection of the fuel dispenser sumps and UST sumps and spill buckets.
The Phase I ESA is completed to evaluate whether Recognized Environmental Conditions (RECs) exist. Examples include: Open LUST site; Closed LUST site but deficiencies with previous closure; long term operation of the UST system without any site investigation; former UST systems with no prior or inadequate site investigation; the potential for orphan USTs; historical vehicle service operations; current or former waste oil UST; car wash oil/water separator; presence of septic system with vehicle service operations; impacted potable well.
The Phase I ESA should include an evaluation of regulatory files related to the UST system(s) compliance to determine the age and construction of the USTs and product piping, a summary of the overflow prevention and containment sumps, leak detection, Financial Responsibility method, and whether any violations exist from regulatory inspections. The EPA and Michigan Department of Licensing and Regulatory Affairs (LARA) recently updated the regulations related to sumps and spill buckets, beginning in 2018 requiring testing to prove they are liquid tight. There are some gas stations that are out of compliance with past LARA sump inspections and others that have not been inspected that would be out of compliance. The presence of some types of old product piping is also another documented problem that may be a reason for concern.
The visual inspection of the sumps and spill buckets often identify whether a release has likely occurred. There may be deteriorated fittings such as rubber boots and gaskets around piping and tubing. Sometimes there are no sumps. On occasion, old unreliable flexible piping is discovered, which differs from the LARA records.
After the RECs are known from the Phase I ESA and compliance issues identified, the approach to further environmental due diligence often varies from operator to operator. In many instances, a Phase II ESA to drill soil borings is completed to collect soil, water, and vapor samples to assess the environmental risk. If contamination is discovered a confirmed release must be reported to the state within 24 hours. Proper coordination between the buyer and seller is important for coverage by the MUSTA fund or private insurance. In Michigan, a buyer of a contaminated property can conduct a Baseline Environmental Assessment (BEA) to pursue statutory liability exemption from liability for preexisting contamination. Reporting a release requires compliance with Part 213 (the regulations governing LUSTs), which requires that the nature and extent of the contamination be determined, the receptors and contaminant pathways identified and a plan to clean up the contamination. This often involves excavation, vapor mitigation and/or other remediation techniques, long term monitoring, engineering controls, and deed restrictions.
Depending on site conditions some buyers elect to not perform any Phase II ESA to establish preexisting conditions, and to rely on the MUSTA fund for coverage in the event a fuel release is discovered after ownership transition. Factors that influence this approach include the age of the UST system(s), whether the site is an open LUST site or a closed LUST site with some contamination still present, when the buyer intends on upgrading the existing UST system(s), whether the site is eligible for MUSTA. The existence of the MUSTA fund to pay for the cleanup of a leaking UST site helps with the sale of gas stations. However, there are specific requirements to be eligible for MUSTA.
Also, MUSTA may not cover some or all cleanup costs if there is already documented existing contamination. MUSTA also has limitations on the number of releases that are reported at a site. MUSTA has an annual limit of either $1 million or $2 million depending on the number of USTs that an owner has. This annual limit is spread out across the number of new release sites that an owner has that year. For example, if an owner reports releases at four sites in 2021, then there would be a total of $1 million or $2 million to be used between the four sites. If the buyer is purchasing a portfolio of gas stations proper planning should take place for the timing of potential fuel release discoveries to ensure that there will be adequate MUSTA coverage if the environmental due diligence could result in releases being discovered.
A buyer should carefully plan the number of UST system upgrades that they plan on doing in a year since if releases are confirmed during the upgrades MUSTA has a maximum amount that would be spread out at those sites. Another thing to take into consideration when planning UST system upgrades is whether the entire system will be done at once or over time. Many gas stations have existing UST systems that are different ages and have different construction materials. This can result in a staged plan for the upgrades. For example, the diesel UST system may be older and located in a separate area of the site from the gasoline UST system. Staging a UST system upgrade over time could result in multiple releases being reported and more than one MUSTA claim for a site, meaning more than one deductible (i.e. either $2,000 or $10,000). Also, as previously mentioned MUSTA has a limit on the number of releases that can be reported at a site to be eligible for coverage. An unintended consequence of these MUSTA requirements is owners not upgrading UST systems until there is a release.