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Common Environmental Issues in Auto Dealership Transactions

By: Gregory A. May, Esq.

Common Environmental Issues in Auto Dealership Transactions

Older auto dealership properties seem to regularly trigger poor reports from environmental assessment companies, thus triggering Phase II investigations, and, in some cases costly remediation. Sellers can be surprised to learn that their transaction will be delayed or jeopardized as a result of a “dirty” Phase I environmental assessment; however, there are strategies to proactively address these issues before they arise in due diligence.

First, Sellers should understand that most transactions involve financing of the dealership property from a third-party financial institution, which, with little exception, will require that a new Phase 1 environmental assessment be conducted on the property. The purpose of the Phase I assessment is to inform the lender and the purchaser of the presence of any recognized environmental conditions (RECS), historic environmental conditions (HRECs) and provide a purchaser with guidance as to solid business practices moving forward. Should a REC be discovered, the report will likely recommend further investigation, which the lender will no-doubt require.

In such a case where further investigation is recommended, the Purchaser and lender will be required to obtain a Phase II inspection of the property. This could entail drilling, water sampling, and other tests to analyze the scope of any potential contaminants. Depending on the results, the engineers may recommend that remediation activities are conducted or that results be reported to state environmental agencies. This is where the transactions can slow to a crawl, and where parties are forced to have difficult conversations about curative expenses.

Prior to marketing a property for sale, Sellers should consider the age of their improvements and prior operating practices, and further understand some of the most common triggers for a poor environmental assessment in a dealership property. Some of the more common issues that we see involve the following:

  • In-ground hydraulic lifts: Many older repair shops use or previously used in-
    ground hydraulic lifts that contain a reservoir of hydraulic oil. These lifts are
    known to leak; and their presence, even if previously removed, can oftentimes
    trigger a REC unless their removal has been properly documented.
  • Wash Bays: Floor drains in wash bays and repair shops can create heartburn as
    well, since there is a presumption that unscrupulous employees may use the
    drain for improper disposal of chemicals and petroleum products. These types
    of drains, without a properly installed and maintained oil-water separator or
    filtering device may raise the red flag as well.
  • Septic tanks: Septic tanks, like wash bay drains, can also give rise to concerns
    that improper chemicals and petroleum products may have been flushed down
    the drains, and are leaking into the soil around the septic drain field.
  • Underground Storage Tanks (USTs): Many older dealerships and prior gas station sites contain or contained at one time an underground storage tank for petroleum-based products. These tanks, like the in-ground lifts, are known to leak, and you can expect a recommendation for further testing if their removal has not been properly documented.

The thought here is that an ounce of prevention is worth a pound of cure. That is, Sellers should consider doing their own investigation prior to marketing the property for sale. Once a Seller has properly assessed their property and potential environmental conditions, they can locate prior records and make a decision as to how issues can most easily and efficiently be cured, without a worried purchaser breathing down their neck. Alternatively, they can disclose the issues to the prospect in advance, so as to avoid future concession requests. Just remember, it is far easier to hand a buyer a clean Phase I assessment and/or notify a purchaser of specific conditions prior to inking a deal, rather than waiting until due diligence has begun and inspections are underway.