Corporations throughout the U.S. have significant corporate real estate holdings, whether it is land for future development or improved facilities (Property). When a company has to sell a Property because it is an asset held-for-sale or impaired, the purchaser will require that there be an environmental assessment, a phase-one study and generally a phase-two if the initial study indicates potential ground and/or improvements that have or exposure to hazardous substances (HAZMAT).

Although there are several issues associated with HAZMAT exposure in real estate use, the focus of this paper is on hydrocarbons in the soil and their potential mischaracterization by an investor. Hydrocarbons are compounds that contain only carbon and hydrogen. Hydrocarbons are classified as either saturated hydrocarbons or unsaturated hydrocarbons. This classification is based on the number of bonds between carbon atoms. Ethene is a saturated hydrocarbon and ethene is produced by most fruits and vegetables. A number of volatile organic compounds were measured including acetone, methyl ethyl ketone, toluene, ethyl benzene, styrene, o- oxlene from decaying food.[i]

For example, I was the corporate real estate director for a major U.S. company. The Company had a significant Property portfolio at the time. One significant Property had been designated as an asset held-for-sale and executive management wanted this asset off its balance sheet within the next 9 to 12 months. A few months after listing the property for sale, a broker was able to locate an investor. This particular investor was a major local developer (Purchaser) and had its own in-house legal and environmental scientists.

The purchase and sale agreement (PSA) had a tiered due diligence period; the Purchaser was within the second phase of due diligence and would soon have to put into escrow an additional good-faith deposit and the total deposit would then be non-refundable. Within just a few days before going hard on their earnest money deposit, they requested a meeting with the Company as they had “discovered hydrocarbons in the soil” and wanted to discuss how to resolve this issue. I can still see the Purchaser’s environmental scientist on the other side of the table telling me that they had found hydrocarbons in the soil and that it would cost approximately $500,000 to remediate the contamination. When he explained to me the type of hydrocarbons and parts per billion (PPBs), I was insulted by the request. I knew from prior experience and studies that this level of contamination could have been caused by a rotting sandwich.

An important point here is that the environmental scientist’s position was factual and he had the study to prove it; albeit, he mischaracterized his findings. Someone may have had a picnic on the property and left food that was now decaying and creating this level of hydrocarbons. Notwithstanding, this is not to make light of volatile organic components (VOCs) or hydrocarbons that may come from dumping organic materials onto a site; this was not the case here. The PPBs and nature of their findings were not at any required remedial action level but were more germane to what you would find on a site that may have some naturally occurring low-level VOCs.

Suffice to say, I didn’t agree to this request and the Purchaser still closed the transaction as required under the PSA. What is interesting is how quickly the Purchaser and his environmental expert backed off their position once I correctly characterized their findings.

Had I not been at this meeting with the investor, the Company would have most likely reduced the sale price by $500,000. In fact the Company’s broker was recommending that I consider their request. There are several key takeaways:

1. If you are a well-capitalized, major corporation, understand that the larger and more complicated the transaction, the more susceptible a Company is to mischaracterization of the facts and fraud

2. Have a subject matter expert who can not only interpret the findings but who can also put those findings into context (including action levels for residential and commercial real estate use)

3. It is advisable for a company to have an environmental lawyer, development and disposition experts who can review all environmental studies and recommendations

In conclusion, having spent years working as an executive corporate officer for several major U.S. companies, I have seen numerous times when a sophisticated investor has tried to take advantage of a company either during contract due diligence or shortly after the close of escrow. The aforementioned situation is but one of many potential areas where this can happen. Corporate sellers beware.

[i] Fleming-Jones, M. E., & Smith, R. E. (2003). Volatile organic compounds in foods: A five year study. Agricultural and Food Chemistry, 51, 8120–8127.

Nhu-Thuc Phan · Ki-Hyun Kim · Eui-Chan Jeon · Uk-Hun Kim · Jong Ryeul Sohn · Sudhir Kumar Pandey (2012). Analysis of volatile organic compounds released during food decaying processes. Department of Environment and Energy, Sejong University, 98 Gun Ja Dong, Seoul, 143-747

#lenderliability #hydrocarbons #environmentalcontamination #fraudbybuyer #corporatesellers