Environmental contamination can be an unwelcomed surprise and a hindrance when a small business seeks to sell or otherwise transfer its property or assets. Contamination may cause small business owners who don't know their options to lose potential buyers or needlessly accept a fire sale. However, it doesn't always have to be that way.

Over the past decade, law and business have adapted to the necessity of keeping contaminated property productive. Practices which were accepted and appropriate when a business began in the 1950's and 1960's may now be frowned upon by zealous regulators and scrupulous prospective buyers who will not touch a property without a complete environmental assessment. In the last few years, however, the "sky is falling" attitude towards contamination has been replaced with the knowledge -- often gained through painful experience -- that the fact or perception of contamination should not, by itself, be a deal-stopper. Nearly any risk can be managed and minimized in a commercial or industrial setting.

The transition from fearing contamination to dealing with it begins with the recognition that not all contamination is the same. Some can even be left alone, depending on the nature of the contamination and future use of the property. It's important to note that violation of a regulatory standard does not by itself create an unacceptable risk to human health and the environment. For instance, there is no reason for the soil and groundwater underneath an industrial parking lot to meet the same standards as a daycare center using well water.

What Can Be Done?

The first step is to accurately identify and analyze any environmental problems with the help of competent professionals. Once the contamination has been quantified, sellers can explore different methods to lessen or overcome any negative impacts.

Understanding that not all contamination is a threat, North Carolina has moved (though not as quickly as other states) to consider and, in some cases, implement risk-based corrective action (RBCA). For example, the Division of Water Quality issued its RBCA rule for underground tank releases -- one of the most common sources of contamination. Owners of low-risk sites have no groundwater cleanup obligations and modest (if any) soil cleanup obligations. For all risk categories, the rules allow low-cost approaches including, in appropriate circumstances, "passive" remediation, which essentially allows time and nature to take their course. Response costs incurred consistently with RBCA are potentially reimbursable from the State's leaking petroleum underground storage tank cleanup funds. The state has also attempted to take a risk-based approach to assessment and remediation of dry-cleaner solvent contamination.

Brownfields

"Brownfields" is perhaps the hottest and most discussed topic in environmental circles at both the state and federal levels. Recognizing that regulatory requirements and expansive liability contribute to the abandonment of tainted properties (brownfields) and speeds development of unpolluted sites (greenfields), environmental agencies have begun to offer incentives, policies and limited protection for redevelopment of brownfields sites. The jury is still out on North Carolina's Brownfields Act, which does not provide as much protection as other state acts and still operates on the "polluter pays" principle. But it does provide prospective developers the opportunity to negotiate reduced cleanup levels and receive liability protection. Winston-Salem and High Point have both received EPA Brownfields grants.

Financial Obligations

Insurance is a more traditional method of providing protection, and new insurance products are gaining acceptance. Although most insurance policies have "pollution exclusion" clauses, business owners should always check their existing and former policies to see if they might provide some protection. One useful environmental insurance product is called property transfer liability insurance, which can protect owners, purchasers and lenders against the risk that existing contamination is not found before purchase. Cost cap/stop loss coverage concerns the risk of remediation cost overruns and covers cleanup costs which exceed the estimated costs of an approved remedial plan.

Most property has environmental risks, and sophisticated buyers and sellers know that it can be managed and even turned into an advantage. Many new development companies have formed in the past few years for the sole purpose of identifying and purchasing environmentally tainted properties which, because of new policies and attitudes, are now economically viable. Any business owner considering the transfer of contaminated property needs to know what these companies know: that there are options which can facilitate transfer and even increase the value of the property.

Steve Berlin and Don Nielsen specialize in environmental and land-use law with Kilpatrick Stockton, LLP, in Winston-Salem. Their practice areas include environmental compliance and litigation, business transactions involving environmental issues, zoning and property rights. Steve Berlin can be reached at 336/607-7304 or at sberlin@kilstock.com. Don Nielsen can be reached at 336/607-7329 or at dnielsen@kilstock.com.


Reprinted with permission. First appeared in the May 2000 issue of Business Life Magazine.

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