Due Diligence on Apartment Building – Part 3

Jim Sullivan, a real estate broker from New Jersey, bought tax lien from Gloucester County in 1999. The defaulted owner was Accutherm, a thermometer factory. Sullivan foreclosed the property, hired contractor to make building modification, and leased it to Kiddie Kollege Day Care Center in 2004.

Apparently, the building was contaminated with mercury and the parents of 94 babies and children sued him. Mr. Sullivan asked Superior Court Judge to void the foreclosure and then he sued the previous building owner, Accutherm. Unfortunately, Sullivan is still liable to clean up the mercury. The state Department of Environmental Protection ordered Sullivan to demolish the building and clean up the site, an estimated $1 million project. OUCH!

Source: Gloucester County Times, The Philadelphia Inquirer

The story is a perfect example of investor’s failure to conduct due diligence on environmental issue. There are firms that specialize and are experienced in environmental analysis and engineering. They can do proper research to determine the potential presence of hazardous materials. Examples of hazardous materials are asbestos, lead-based paint, mold, radon, gas leaks from underground storage tanks and … mercury. Get familiar and review environmental regulations at federal, state and local jurisdiction.

You may want to consider phase 1 environmental assessment. This assessment will examine the history of the building and determine if potential contamination exists. It doesn't involve physical analysis and testing of the soil, water, air or building material. If it is identified that further investigation should be performed, then phase 2 environmental assessment has to be done. In phase 2 assessment, actual sampling of soil or water will be collected and tested in laboratory.

Contaminated sites are often referred to as brownfields. In one of his articles, Joel W. Reese, an environmental litigation attorney from Dallas, suggested that buyer should add a transfer of claims for environmental injury in the deed. In general the right to seek compensation for environmental injury is a personal right that accrues to the owner at the time injury happens. Without transfer of claims in the deed, this right is left with previous owner, and successor buyer may not be able to recover environmental injury damages without first incurring the cost of cleaning up the property. Consult attorney for this matter.

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