Environmental due diligence in dealership transactions

By
George A. Johnson

NOTE: The following article is from the collection of articles in our Automobile Dealership Buy/Sell Newsletters. The newsletter deals with the complex area of buying and selling automobile dealerships. Some of the material may not be up to date because of changes in the law from the date shown at the end of the article. This article is not to be taken as legal, accounting, tax, or other advice. You should consult your own professionals for such advice and for any updating of the information provided. 

Any pending sale, purchase, financing, or refinancing of a dealership should be—and probably will be–subjected to the environmental due diligence process. The way the state and federal laws are written, any current or former property owner, operator, or lender can be held liable for the cost of regulatory agency-required site remediation, even if he or she didn’t cause the contamination, wasn’t aware of it, didn’t own or operate the property when it occurred, or the contamination wasn’t illegal when it occurred.

The first step in the environmental due diligence process — and usually the last step — is the phase I site assessment. Most lending institutions, viewed as the “deep pockets” for environmental impairment liability, will require that a phase I site assessment be performed as part of the due diligence process, like a title search or an appraisal, when a dealership is financed or refinanced. Likewise, any buyer involved in a dealership buy-sell transaction who will either be purchasing or leasing the seller’s dealership site will want to perform environmental due diligence as a condition to closing the transaction. The purpose of a phase I site assessment is to assess the potential, if any, for environmental impairment liability. The assessment should be performed by a Registered Environmental Assessor, a CAL EPA designation.

A phase I site assessment includes a physical inspection of the dealership property, observation of surrounding properties, and a review of onsite records—such as waste disposal and permits to operate equipment. It also includes a computer database search of all known hazardous waste sites within a one mile radius of the property, and inquiries to regulatory agencies of jurisdiction for information about the address—such as business plans filed with hazardous materials inventories, inspections, or unauthorized releases. The study may include review of historic aerial photographs and fire insurance maps, as well as characterization of local and regional geology and hydrogeology.

The Assessor’s report will describe the property facilities and surrounding properties, note any evidence of contamination, and summarize findings of records searches. The report may include site photographs, public records, and dealership records. Finally, the Assessor will make any necessary recommendations. In most cases, this report will be all that is required in the environmental due diligence process.

If a real or potential problem is encountered, a “phase II” further investigation may be warranted. For example, if suspect asbestos-containing materials (ACMs) are present, an asbestos survey may be scheduled. At that time, a physical inspection of the property is conducted by a certified asbestos inspector, who collects ACM samples for delivery to a state-certified laboratory for analysis by polarized light microscopy for asbestos content. “Friable” (meaning crushable or pulverizable under hand pressure) asbestos may require abatement by a licensed abatement contractor. Demolition or major renovation requires abatement of all affected ACMs.

If potential subsurface contamination is suspected due to chemical leaks into degraded pavement, possible leaking underground storage tanks (USTs), or other suspected releases, a subsurface investigation may be required. Such an investigation can range from collecting shallow soil samples with a hand auger, to collecting deeper soil samples with a truck-mounted geoprobe, to collecting still deeper soil samples with a high-torque truck-mounted drill. In each case, soil samples would be delivered to a state-certified laboratory for analysis.

If groundwater contamination is suspected, groundwater samples can be collected with a hydropunch sampling device. This device allows groundwater sample collection under conditions similar to those encountered in a groundwater monitoring well. Groundwater samples can also be collected with a dedicated groundwater monitoring well. This allows for periodic monitoring of groundwater. Again, groundwater samples would be delivered to a laboratory for analysis. If significant groundwater contamination is present, it is usually necessary to involve a region of the California Regional Water Quality Control Board.

A good method for screening a large area for the possible presence of volatile organic compounds, such as contaminants from gasoline or solvents/degreasers, is a soil vapor survey. Probes are installed with a percussion hammer and hollow probe rods. The probes are removed, leaving a sampling tube that collects samples of soil vapor—the void space between particulates. Samples are collected with an above-ground vacuum pump and analyzed onsite in a mobile laboratory with a gas chromatograph. The probes are then capped flush with the surface and can be reused to monitor subsequent subsurface conditions.

If USTs are suspected or known to exist but their locations are unknown, a geophysical survey will be needed. A magnetometer and a conductible metal detector will identify any dipole anomalies—the magnetic signature of a UST. The approximate lateral dimensions of the UST will then be marked on the ground. In some cases, ground-penetrating radar will then be employed to more precisely define UST dimensions.

The California State Water Resources Control Board requires that all USTs that are abandoned or not fiberglass or double-walled steel, with leak detection monitoring systems, be removed and “closed” by December, 1998. More precisely, this “closure” means that the property owner is given a final closure/ no-further-action letter by the regulatory agency of jurisdiction.

Removing a UST requires several permits and careful attention during the following steps. Soil around the UST is excavated and exposed. A hole is chisel-cut in the top of the UST for inspection. All liquids, sludges, and/or solids are removed from the UST and hauled to an approved disposal facility under manifest. The UST interior is triple-rinsed prior to removal, with rinseate hauled to an approved disposal facility under manifest. A gasoline UST must be “degassed” to render it inert. A marine chemist or certified industrial hygienist then certifies that the UST is clean and ready for removal. The UST is then removed and transported to an approved disposal facility for recycling. Soil samples will be collected from beneath the UST excavation bottom and possibly from other locations. The soil samples are then transported to a laboratory for analysis, as specified by the permit. A final closure report is then submitted to the regulatory agency of jurisdiction.

If those soil samples show that contamination is encountered at or above cleanup thresholds, often the most effective strategy to accomplish site remediation now is to perform exploratory excavation with a backhoe or excavator, in conjunction with an onsite mobile laboratory. The affected soil will need to be hauled under manifest to a state-approved disposal facility. A number of remediation technologies are available in cases where this strategy is physically impossible or cost-prohibitive. This remediation is considered a step in UST closure, with the end result still being the property owner given a final closure “no further action” letter by the regulatory agency of jurisdiction.

Overall, regulatory agency involvement is sometimes desirable, even required, in many contamination situations. Even in cases of serious contamination, property owners and lenders may want to take the property, under agency supervision, to the point of due diligence investigation or remediation where a final closure letter is possible. This can facilitate a property sale transaction or loan.

This article was written in 1998.

Mr. Johnson is president of Athanor Environmental Services, Inc., a Pasadena, CA environmental consulting firm that provides all of the services discussed in this article. He can be reached at 626-440-1736.