BOO! Lessons from experience: Buying gas stations/Cstores right!

As a professional in environmental and business risk mitigation for 25 years, I have seen many "boo-boo" scenarios in commercial real estate, some many times.  Some of the more painful ones involve gas station/convenience stores.  Some of this pain is simply a result of the nature of the business involved. Often, the buyer is so excited by the reward side of the equation that he or she is blind to some of these risks.

Another factor is sometimes because these types of businesses are often acquired by folks who may have emigrated here from another country and culture, and who may not understand some of the subtleties of doing business here in the US.  When these two factors are combined, it can really create some problems if someone isn't able to help keep things on a good course.

In a great article on LinkedIn, my friend Habib Shah goes into many facets of this scenario.  After reading his analysis, I felt compelled to add my own perspective which sadly has been hard-earned, sometimes by having to try and help people pick up the pieces after they've made a big mistake!

Here's my additional perspective:

1) A high percentage of Underground Storage Tank (UST) system leaks are caused by leaks in the transfer piping.  Habib's estimate for piping replacement at $50,000 is reasonable. If the underground tanks need to be replaced, you can add $100,000 to that.

2) Stay away from single-walled piping and tanks except for in very specific circumstances. Insurers sometimes don't like to underwrite single-walled systems, and when they do, it can be more expensive. I usually recommend working with an environmental insurance specialist like Chris Bunbury who knows the tricks of the trade to mitigate these risks.

3) The older the underground tank system is, the more risk it has. Other factors which increase risk include the care with which the system was originally installed, the local geology, the diligence with which the system has been maintained and tested over the years, and the integrity, calibration, precision and accuracy of the testing methods and equipment.

4) Don't overlook the risk of existing or historical  contamination liability. If not handled correctly, this can cost a buyer much more than the property is worth.  Regulatory agencies are always looking for revenue, including fines and cleanup costs levied against liable parties, even if they didn't cause the contamination!

5) Don't rely upon the environmental report (or other reports for that matter)  provided by the seller unless it is certified also to the buyer with their name on it.

6) Environmental reports are only good for a limited amount of time. A five year old report has little value.

7) Just because you are buying on a land contract or cash and there is no bank involved to require an environmental report does not mean you should not do your own environmental due diligence.  The consequences for the buyer are the same either way. When a bank or SBA requires environmental work, they are actually doing the buyer a favor that he should be equally willing to do for himself even if there's no bank involved.

8) The sellers assurances that "everything is fine" may make the buyer feel good, but in business terms, this means little. In some cultures around the world, a handshake still means everything in terms of trust. Here in the United States, it is best to follow Ronald Reagan's sage advice to "trust, but verify". Make sure that as a buyer you hire your own professionals, and don't rely upon assurances by the seller or of people contracted only to him.  They have fiduciary responsibility to the seller alone.

9) "Let the butcher cut the meat." This adage is never more true than when it comes to buying commercial real estate. 

Don't try to do your own environmental due diligence or your own legal review.

Here are some cost saving resources to help you in these two key areas:

Environmental Due Diligence: Depending on your needs and the situation involved, there are environmental due diligence products available which start at less than $300. Contact me through LinkedIn (http://www.linkedin.com/in/daveversluis/) to find out more, or visit www.sierraconsultants.net

Attorney Review of Sale Documents: When it comes to attorneys, obviously they can be very expensive. However, there is a growing trend towards accessing legal legal advice through inexpensive service plans. These simple plans enable unlimited access to an attorney for virtually any matter without worrying about receiving a bill! Family plans start at $20 per month.  Small business plans are more robust and start at about $40 per month. I've been using these services myself for years and have found them to be an unbelievable value! Contact me through LinkedIn (http://www.linkedin.com/in/daveversluis/) to find out more, or visit www.davidversluis.legalshieldassociate.com

Credential plagiarism? Big problem. Here's how I handled it.

Crazy as it sounds, just last week (March 20 2014) I caught someone stealing my professional credentials on Linkedin!  

I documented the experience, and then shared it with some colleagues in an environmental consulting group on Linkedin where I am a member. The response was very supportive.

As a result of that feedback, I was encouraged to share it here with you, my clients, as an object lesson.  There are some important takeaways from this experience:

1) If this kind of fraud can happen to me, it can happen to anyone - including you. So be vigilant, and if you catch someone, don't be afraid to call them out like I did!  In this case, I consulted with my attorney on the matter, and he encouraged my action.  The fraudster disappeared from LinkedIn within a few days.

2)  The feedback I received from my colleagues really confirmed the extent to which this fraud hurts the perception of our entire profession! Again, this goes for your profession too.

3) When you hire a professional (in this case an "environmental professional) demand to see proof of credentials, references, and liability insurance if you have any question whatsoever about the veracity of the person you are dealing with.  

4) Remember that the results you get are only as good as the people who do the job for you.  Price (high or low), the size of the company (big or small), and claims made about experience and capabilities in marketing materials may be a good indicator - or - may have ZERO relevance to reality in the "information age".

5) There can be very serious and substantial legal liabilities for those who employ, hire, or recommend someone who is using false credentials, and damages later result.  In the case of environmental contamination, the damages can run into the hundreds of thousands or even millions of dollars!

"Caveat  Emptor" has never been more important than it is today.

How High - or Low - Are Your Standards?

"We KNOW the difference
between a Mountain and a Molehill!"

Standards? What Standards?

The environmental consulting industry came about in the wake of the Comprehensive Environmental Response, Compensation, and Liability Act  (CERCLA) of 1980, commonly known as “Superfund”. 

The Superfund Amendments and Reauthorization Act (SARA) amended CERCLA in 1986, and reflected EPA's changes based upon experience in administering the complex Superfund program during its first six years.

One of the important concepts put forth from these laws was “strict, joint and several”  liability for environmental cleanup costs. This meant that liability for environmental damage was apportioned without consideration as to whether or not a party acted carelessly or unreasonably; 'joint and several' meant that any liable party can be forced to pay for all of the damages, even in cases where all the damages attributable to each party cannot be determined.

While CERCLA intended liability to be strict, SARA intended in a limited way to reintroduce concepts of negligence. SARA introduced reasonableness concepts into its guidance. One of these concepts was "appropriate inquiry" - invoking the time-tested standard of a "reasonable person" with the same requisite knowledge as the purchaser, and involved in the same type of transaction

From there, the courts began to apply the "reasonable person standard" in determining what level of due diligence was adequate. For several years, the "standard" for the adequate level of due diligence was simple:

Whatever it took to find a problem.

Remember this.  We will come back to it later.

This high standard - "whatever it takes" - put a great deal of risk on to the burgeoning environmental consulting industry, comprised of mostly retooled civil engineers and a few geologists at that time.

Enter ASTM - Pros and Cons

In 1993, the American Society for Testing and Materials (ASTM) put out their first E 1527 standard for Phase I Environmental Site Assessments (ESA's).  

This standard did a good thing: It standardized report formats, which heretofore had been highly variable. This makes processing the information easier for the user.

However, there were a number of unintended consequences - including but not limited to:

• A checklist mentality began to infect the environmental consulting industry.  As long as the items in the "standard" were met, the consultant's liability was limited. 

• This also meant that consultants relied less and less upon professional judgement and experience in developing their opinions, and began to find ways to hide in the standard in order to reduce their exposure. You may have noticed from time to time that when you read a Phase I conclusion, there is sometimes a great deal of word-mincing about the various definitions, usually related to the ASTM E-1527 standard. Now you know why.

• The value of the environmental consultant performing the work became less important if the deliverables were all ostensibly the same.  

• With the end result becoming more homogeneous, the ESA business began to commodotize, beginning a downward pattern on pricing.

• With the downward price pressure, it became more difficult to employ experienced staff in order for firms to remain profitable.  They began to employ less qualified staff, who were more likely to render judgments which were not accurate or even valid.

• Fast forward to 2014, and we have large Phase I "mills" partnered with large database firms to offer "risk management" services.  These services are often based on nothing more than a database dump of government-listed sites, sometimes coupled with a site visit by a subcontractor working out of their basement.  Many of these "subcontractors" are not qualified and simply show up to take a few photographs for a few hundred dollars.

Meanwhile, ASTM has maintained it's relevancy - and made a tidy living - by promulgating "updates" to its standards every 5 years or so.  The most recent of these (December 2013) caused some debate within the consulting industry as to whether it has any value, since it varies little from the previous version except for a few clarifications.

A Standard Your Mom Would Approve of!

When I first entered the environmental industry in the late 1980's and early 1990's I was taught how to perform environmental investigations based on the "whatever it takes to find the problem" standard prevalent at the time.  

This is a much higher standard than any of the ASTM or EPA standards which were subsequently promulgated.

I've always taught my employees to operate according to this standard, and after 21 years, our firm still operates under this premise to the present day.  Yes, we adopt and conform to the new standards as they come out every few years. And certain banks and governmental agencies have their own standards. But these are always less demanding than our own methods and expectations.  

We believe our professional judgement is much more valuable to our clients than our ability to tick items off of a checklist, and we'd like to believe that this is part of the reason we are still in business 23 years later.

Legal Consequences?

When you are looking for liability protection from your environmental due diligence, make sure your consultant is performing to the highest possible standard. If he/she is dancing around on the head of a pin, relying on narrow definitions in the ASTM standard to avoid having to confront difficult issues, it can be a real red flag to potential problems down the road that all-too-often end up being decided in court.

Sometimes Legal Protection is not the Goal

Complying with a "standard" is not particularly important if the purpose for the environmental assessment is not to qualify for specific legal defenses from potential liability under CERCLA as an innocent landowner, a contiguous property owner, or a bona fide prospective purchaser. 

Sometimes due diligence is performed for reasons other than liability protection.  In those cases, 

• There may be no formal, unified standard at all
• A standard may be specific to a particular lender
• A standard may be adopted from an agency (e.g. SBA)
• A scope of work may be tailored to the client's specific request

These situations are all perfectly acceptable based on the needs of the situation and the professional judgement of the Environmental Professional without necessarily requiring an ASTM or AAI Phase I ESA.

• A "standard" in and of itself does not bestow any magic to the quality of the investigation. 
• A "standard" can, however, create liability exposure for both the consultant and the user (the client) that would not have existed otherwise. 
• Remember to use a hammer when you need to pound a nail, but not when you want to wash the dishes!

Future Outlook For Environmental Assessment Standards

Phase I ESAs will likely remain an important component of the due diligence picture, but they will likely decline in number. 

Phase I pricing is probably at or near its floor, between $1000 and $2000 depending on local market conditions. It will likely remain so.

Technology will enable less expensive forms of environmental due diligence to become more widely used.

The marketplace will drive variability in the way environmental assessments are performed, resulting in cost -effective solutions for users.  This is good news for lenders, borrowers and the public in general, as more environmental risk information will be available at an affordable cost.

EZ-Screen is specifically designed to avoid all conflicts of interest:  

• Using  EZ-Screen™ as the first  step on every deal eliminates the possibility of most or all conflicts of interest, and thus puts you in a better light in your customer's eye.  
• Plus, it's a great value. 
• Learn about EZ-Screen "Clean or Free" advantage here.

• Just keeping these things in mind can make a big difference in your ability to guide the process away from conflicts. 

• Review your organization's environmental policy and make changes where applicable.  
• If your organization does not have a formal environmental policy, consider using the SBA's environmental policy as a template - even on non-SBA deals.  
• It won't address all the conflicts of interest discussed in this article, but it's a good starting point if you've got nothing else.

• If you're uncomfortable reviewing and changing policy on your own, or just want to have a second set of eyes on it, having your attorney review it is a great idea. This can identify and possibly mitigate potential conflicts, among many other things.  

• If a traditional attorney doesn't fit the budget, consider an inexpensive legal service plan. 
• Unlimited access to excellent attorneys in every state, along with many other benefits.
• All plans include document review
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About Us

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Give us a try on your next project and find out what they mean.

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