Day: October 6, 2020

By: Leah Krause, Amy Bauer, and Maureen S. Bayer

The ongoing economic disruptions from COVID-19 have impacted many businesses, some of which will inevitably enter the commercial and industrial real estate market. It will be essential for potential buyers to understand the risks associated with these potentially distressed operations or properties through due diligence. These risks could include:

• Not operating in compliance with all regulations due to potential cost-cutting, which could result in regulatory enforcement actions.
• Inflation of true profitability due to cost savings resulting from non-compliant operation.
• No due diligence performed before buying into a company located on contaminated property.

Thorough environmental, health, and safety (EH&S) due diligence on a potential real estate purchase is recommended for all deals, but for distressed targets, it is key to ensure you are making a good investment and mitigating unknown risks leading to potential costly consequences. Unknowingly purchasing contaminated property can result in liability for that contamination and if it is migrating to a neighboring property, then the liability could be devastating to the business.

A simple strategy for dealing with a distressed asset:

1. Understand the property. If you are considering a property purchase, conduct a Phase I environmental site assessment (ESA) or desktop review. This will help you understand and mitigate environmental risks created by the previous owners/operators.
2. Know if the facility is compliant. Whether it be an illegal discharge to the municipal sewer or unpermitted air emissions, a highly effective way to gauge compliance and focus resources is to conduct an EH&S audit. In the interest of having a starting point, it makes sense that a high-risk operation is the first area of focus on Day 1.
3. Develop a plan. Once you identify risks during the Phase I ESA or audit, leverage existing resources with a solid plan and identify key people to prioritize aspects of the EH&S program. This will evolve your new company beyond perpetual makeshift solutions and close EH&S program gaps to improve your risk profile and increase operational efficiency.
4. Implement the plan. Many EH&S programs can be established and managed in-house with existing talent. It is important to focus on EH&S as an accountability for all, not merely a box on an organizational chart. You may be surprised by existing personnel who will step up if asked, or who care about the environment or safety performance, but have not been given clear direction on how to contribute.

When acquiring a distressed asset, it is important to include an evaluation of EH&S compliance during the due diligence process. EH&S compliance can be very complex – it is understanding laws, regulations, and codes and implementing those requirements at each operating commercial and industrial facility. It is safe to assume that a distressed company diverted resources from EH&S programs to keep the business afloat, which may have costly repercussions for the new owner/operator on Day 1.

Other aspects to consider which could potentially be a higher risk for distressed assets include:

• Whether the distressed company has used any enforcement discretion or forbearance policies due to COVID-19 that provided relief if they were unable to comply with their permits or other operating conditions
• Potential business risk issues common with older facilities, such as poorly maintained asbestos-containing material or lead-based paint, or other conditions unfolding from lack of maintenance, such as mold from water damage or poor ventilation in a vacant building.

Thorough due diligence on a potential real estate purchase is key to ensuring you are making a good investment and mitigating potential unknown risks. Find a partner that can navigate these issues and help you prepare for negotiating opportunities as the deal unfolds. In other words, with proper understanding of risks, and a better understanding of how these risks affect the real value of properties, the proactive company may position themselves to enhance their portfolio, even at discounted prices, while protecting their risk profile.

For more information, see the “Demonstrating Value Through Proactive EH&S Due Diligence of Distressed Portfolios” White Paper by Amy Bauer.

About the Authors

Leah Krause, CPEA  With 20 years of experience across various sectors of the environmental field, Leah brings real-world knowledge to the workplace, enhancing her ability to prepare accurate compliance documents, permit applications, and environmental assessments… Read more.

Amy Bauer, CPEA  Amy brings over 20 years of experience conducting and managing environmental site assessments, regulatory compliance audits and support, and environmental investigations for clients… Read more.

Maureen S. Bayer  With over 15 years of experience in the environmental field and as an environmental attorney, Maureen serves as an invaluable asset to the EHS Support team by providing our clients with sound guidance they can trust…Read more.

By: Beth Hesse, CPEA

In EHS Support’s March 27, 2020 Client Alert, we identified the United States Environmental Protection Agency’s (EPA) temporary policy regarding its enforcement of environmental legal obligations during the COVID-19 pandemic. This temporary policy applied to the EPA’s Enforcement and Compliance Assurance Program with a separate policy issued for activities performed under the Superfund and Resource Conservation and Recovery Act (RCRA) Corrective Action enforcement instruments. Under this temporary policy, EPA could grant enforcement discretion for noncompliance if regulated entities complied with the steps outlined in the temporary policy.

This temporary policy expired August 31, 2020, meaning that EPA has returned to business as usual; the agency will levy civil and criminal enforcement penalties in response to non-compliance. During a September 2020 air quality compliance workshop hosted by the North Carolina Department of Environmental Quality’s (NCDEQ) Division of Air Quality, it was reported that the number of on-site compliance inspections conducted by NCDEQ between March 2020 and June 2020 dropped significantly from 139 on-site inspections in March to 42 total on-site inspections between April and June. However, in July 2020, NCDEQ rebounded to 128 inspections. Regulatory compliance and enforcement activities are returning to “pre-COVID-19” rates, especially in states where COVID-19 restrictions are being eased, like North Carolina.

Similarly, our clients’ portfolio companies have returned to work. Though many of these companies are operating at reduced capacities based on state and local restrictions, as operations pickup, facility personnel are confronted with ongoing environmental, health, and safety (EH&S) concerns, in addition to managing COVID-19 protocols. At its core, these two interests share similar and complementary objectives – protecting the environment and the health and safety of people. Though managing COVID-19 risks has demanded a shift in focus, neglecting EH&S compliance can lead to significant business risks as well as impacts to people and the environment.

EHS Support expects to see the same EH&S compliance issues as we go back to visiting sites. As before the pandemic, these compliance issues occur for several reasons. For example, issues are not identified by facility personnel due to a lack of expertise or training. But after several months of business disruption because of the pandemic, some facilities had personnel retire or get furloughed without a clear delegation of EH&S responsibilities, possibly exacerbating unknown violations. If done without careful consideration, cost-cutting measures could also have unintended consequences on EH&S compliance.

In our April 9, 2019 Client Alert, we suggested that a focused approach to EH&S compliance helps prevent runaway expenses, violations, and loss of a positive corporate reputation. It is also preferred over applying makeshift solutions that may lead to more problems. During the last 6 months, compliance schedules have continued to age – permits may have expired, notifications or annual submittals (e.g., EPCRA Tier 2, Toxic Release Inventory [TRI], or Toxic Substances Control Act [TSCA] reporting) have come due, and training obligations continue to be required. With the TSCA deadline approaching in November 2020, companies will want to get back on track or face the music. For example, as reported by EHS Daily Insider in May 2020, significant fines were assessed for violations of the TSCA, including an ammonia supplier in Georgia that was fined $22,500 for failing to submit a chemical data reporting (CDR) report for a chemical by the required date.

What is the current compliance status of your facility’s EH&S programs? If you are not sure, consider conducting an internal audit or program-specific compliance evaluation. Compliance evaluations can be as simple as asking an employee to closely review their regulatory obligations on a continuous basis, or a more objective approach would be to hire a third-party auditor. Did you know that audits can be done virtually, still giving your company a snapshot of compliance without adding additional exposure to on-site personnel?

When contemplating EH&S compliance, it is critical to have a clear strategy. At a very basic level, the steps are simple:

• Understand the facility/operations
• Identify potentially regulated aspects (e.g., wastewater discharges, waste generation, air emissions, fork-lift operations, fall protection, confined spaces, electrical safety)
• Develop a plan of action
• Fully implement the plan

While EH&S compliance can be complex when you consider the various laws, regulations, and codes that potentially apply to a facility, site personnel can make the most of the resources they have. Rather than become overwhelmed, try to break potential risks into tiers or areas of focus. Is there an operational area where you might be more proficient than another? Does your state offer small business compliance support? Are you able to bring in a consultant to get you started? The last 6 months have shown businesses how to leverage technology to facilitate site inspections and training, enhance site safety protocols, and implement operational efficiencies out of necessity.

The business landscape has changed, but EH&S compliance obligations continue to be in effect. These uncharted times call for balancing ever-evolving responsibilities related to COVID-19 with the ongoing EH&S compliance obligations. By developing and implementing a plan that effectively contemplates both, you can help proactively manage those risks. The show must go on.

EHS Support is a full service environmental, health, and safety consulting firm for a wide variety of industries. We offer site assessments, investigation and cleanup, environmental due diligence, and EH&S regulatory compliance guidance to our clients.

ABOUT THE AUTHOR Beth Hesse is a Certified Professional Environmental Auditor with over a decade of experience in multi-party project coordination, environmental due diligence (including Phase I and Phase II assessments), and environmental compliance (including hazardous waste management, stormwater, spill prevention, air quality, and wastewater aspects)… Read More