Environmental deal killers

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. 

Environmental problems have fast become the most potent deal killers in auto dealership transactions.

Two savvy dealers can come together, analyze the business and real estate value of a dealership, hammer out a deal and then have the entire arrangement wiped out by results of a required environmental assessment that shows that environmental problems will cost them hundreds of thousands of dollars to clean up.

The purpose of this article is to alert you to such potential liabilities and to prompt you to do something about them now, before they cost you a deal and cost you even more to clean up.

Every dealership transaction will require a Phase I Environmental Assessment, which entails a physical inspection of the property and a review of the historical records regarding it -title, historical aerial photos, EPA reports, etc.. Lenders are requiring such inspections because they can become liable for environmentally contaminated properties.

But not just any Phase I Environmental Assessment will do. If a seller hires the environmental consultant to perform the assessment, that report will always be subject to conflict of interest allegations. It is therefore best that the environmental consultant be hired by the buyer, and/or the financial institution financing the transaction.

Moreover, it is essential to hire a consultant from a reputable engineering firm. To date, there are no accepted standards for Phase I environmental auditors and that means that there are a lot of relatively young and inexperienced environments consultants trying to penetrate the market with low fees. This type of consultant may not have the expertise and technical education, not to mention liability insurance, to support their recommendations.

The Phase I assessment should determine whether there is the likelihood of a problem. If a problem is suspected, a Phase II investigation, with field studies, soil listings, sampling and chemical analysis, should be undertaken. If the Phase II investigation determines that potential pollutants are present in the soil and/or groundwater, then clean up will be mandated.

The list of potential environmental problems at auto dealerships includes: leaking underground storage tanks, old sewer leaks, clarifiers, underground lines containing fuels, oils, hydraulic fluids or transmission fluids, waste catch basins, chemical storage rooms or areas, auto detailing areas, body shops and auto painting areas, old run-off water, water containing solvents from service areas or service bays, battery acids, lead and lead oxide, PCBs from old auto parts and underground hydraulic lifts. In summary, any area that contains chemicals, either in liquid or solid form, above or underground may be a problem.

It would be my recommendation that all dealers obtain a confidential Phase I and, if necessary, Phase II assessment right away, even if you have no plans to sell. This is because certain environmental problems may worsen and become more costly to clean up over time, or the law could change to make existing environmental problems even more costly to clean up later.

Take underground hydraulic lift leakage, for instance. An estimated 30% to 50% of underground hydraulic lifts leak. Even though some hydraulic fluids contain highly toxic PCBs, hydraulic fluid leakage is still defined as waste rather than toxic waste.

The present situation is similar to the early days of underground tank leak discoveries. Every auto dealer has heard of the huge clean up costs associated with underground tanks -$4 billion a year for the next ten years, throughout the U.S. That price tag is so high, in part, because tank clean ups must comply with a myriad of environmental testing regulations.

Unlike underground storage tanks, hydraulic lifts are not yet stringently regulated. While the waste underneath them must be cleaned up, such clean ups can be accomplished without the environmental guidelines which increase costs, 300% to 1000%. So, it is prudent to replace all underground hydraulic lifts today with above ground mechanical lifts that cause no environmental liability before the law changes. Many auto dealers have already recognized this and have already switched.

I strongly recommend that whether or not you are preparing to sell, you should implement an environmental management strategy that could facilitate a sale and limit your overall environmental liability. By using spread sheet accounting programs to follow all the dangerous chemicals and materials used at a dealership, you can create an on-going inventory of these problematic substances and spot where you have leakage problems before they get out of hand. Thus, when you are ready to enter negotiations for sale, you will know the environmental reality of your dealership so you can avoid having negotiations derailed.

This article was written in 1993.