Liability spawns opportunity - real estate environmental liability

New Mexico Business Journal, August, 1992 by William Diven

The developer thought he'd found the ideal site for a mixed commercial-industrial project near Albuquerque.

Then a consultant's environmental audit revealed evidence of underground storage tanks and past chemical use on the property.

A more detailed survey estimated a minimum $150,000 cleanup, skewing the cost of the proposed project so badly the deal fell through.

A finance company considering a loan for purchase of a mobile-home park in norther New Mexico decided it was better to look before they leaped.

An environmental audit turned up unregulated trash dumping on the property unrelated to its existing use.

The finance company denied the loan request.

In another instance, a borrower defaulted on a bank loan. The bank chose not to foreclose on the land put up as collateral because of environmental problems.

Instead the bank sued the loan guarantor for the balance due.

The case is still pending.

Then there was the case of the pine-covered tract that seemed ideal for developing expensive and secluded homes -- only for a site assessment to establish that the seclusion had been used to hide illegal transformer oil containing polychlorinated biphenyls, notorious and dangerous substances commonly called PCBs.

There are those, too, who can turn a lemon into lemonade.

A small oil company buying leases from a larger company used the estimated cost of cleaning up existing pollution to negotiate a lower purchase price. Then the smaller company added to its bargain purchase by launching an aggressive clean-up program which resolved the problems for less than the initial estimate.

"I shouldn't run just because there is an environmental problem with the acquisition, but the buyer should know what the risk is before closing," says John Salazar, lead environmental attorney with Rodey, Dickason, Sloan, Akin & Robb in Albuquerque.

"That's why people take this so seriously," he says. "If there's going to be a problem, it's going to be a big problem, not a small one. That's why you make it a problem on the front end to avoid a big back-end problem."

Just a few years ago, prospective land buyers worried little about the history of their real estate beyond making sure it was free of liens and rival claims of ownership.

The environmental movement has changed all that.

Today the wary land developer, manufacturer, industrialist and small business owner must study the land and its previous owners for signs of any past use which might have tainted the soil or water.

Under the law, liability for contamination can haunt a piece of land like a mean spirit waiting for the right moment to terrorize a new owner.

New Mexico lawyers, bankers, Realtors and environmental specialists issue the same warning:

Woe be to the careless buyer who stumbles blindly into a deal only to be stuck with a hefty tab for cleaning up someone else's mess.

Yet with liability also comes opportunity.

Contaminated sites can be cleansed; environmental questions have become a routine part of the commercial real estate business; clean-up costs increasingly are used as bargaining points in property transactions.

The concept of environmental liability may still be new with both the courts and the business community treading tentatively into the future, but a lot of the experts say the future is already here.

The growth in the area of environmental liability prompted the Rodey firm to set up its own environmental section in 1989 and elevate it to a separate department last May.

Before the environmental department was formed, its dozen lawyers worked throughout the company dealing with mining, real estate and Indian law.

Along the way, the firm assembled a handbook on New Mexico environmental laws covering air and water quality, solid and hazardous wastes, underground storage tanks, radioactive materials, public information and emergency planning, insurance and Indian law. The publication in its second edition runs nearly 400 pages.

Richard Alvidrez, who concentrates on environmental law at the Albuquerque law firm of Keleher & McLeod, says there is an explosion in the legal field to prevent pollution problems for new landowners after the fact.

While federal law will exempt an innocent owner from liability, to claim that exemption the new owner must have made a diligent effort to identify pollution before closing the deal.

"If you get in the chain of title, you are a potentially liable party," Salazar says. "Even if you are innocent, you can incur a lot of costs in extricating yourself."

That has led to a growth in the environmental consulting industry which provides environmental audits known in the trade as Phase I, Phase II and Phase III. A Phase I audit, generally costing from $1,000 to $3,000, covers property records and a property inspection for hints of past contaminating uses.

If a Phase I audit raises a concern, the Phase II survey includes field sampling to see if hazardous materials actually are in the soil or water at the site. Phase III identifies the extent of the pollution and estimates the cost of cleanup.