We recently had to work through an environmental issue on a transaction because of shoddy work by a firm that completed the prior Phase I Environmental Site Assessment (ESA) and lack of documentation on the removal of an underground storage tank that occurred prior to 1992.
The story starts with the fire department. Its records indicated up to four underground storage tanks (USTs) were installed on the subject property at the time of development in 1969. An ESA completed in 2000 stated that on the date of inspection by the ESA firm no USTs were identified on the property. This was inconsistent with the fire department data. Therefore, the ESA firm returned to the site with a metal detector to determine the potential locations of the tanks. No metal objects were found. The ESA firm noted that the building superintendent for the property indicated all of the tanks were removed prior to 1992. No documentation of these removals was located by the ESA firm during the course of the Phase I investigation.
You cannot close on a CMBS conduit loan that lacks proper documentation. It must be clear in the documentation that soil contamination did not occur. It seems clear USTs were installed and subsequently removed. The ESA firm should have flagged the lack of documentation as a “Recognized Environmental Concern” (REC) and required further investigation and testing.
Our borrower had two choices:
- Phase II Investigation: The use of ground penetrating radar would identify the general locations of the former tanks and confirm they were actually removed. Second, soil borings in the area(s) of the former tanks would be required, which would take approximately 20 days.
- Environmental Insurance: We reached out to the insurance consultant working on the transaction for a quote to insure over the risk.
In the end, we received a very competitive quote for environmental insurance and closed after binding coverage. The moral of the story is to always document any tank removal. Undocumented removals will always be flagged as a REC in CMBS and will have to be mitigated before the transaction can close.