By Scott Anders
For those familiar with commercial real estate deals, it is well known that buyers and lenders want to see a No Further Action letter (“NFA”) when dealing with property that has suffered some sort of environmental contamination. An NFA is seen as a panacea for all environmental ills on real property. Lenders demand to see an NFA before they will loan money to any potential purchaser. Real estate brokers will tell you that attempting to sell contaminated property without an NFA will lead to far fewer potential buyers and a greatly reduced price. Many prospective buyers do not want anything to do with a contaminated property without an NFA.
What many banks and real estate brokers do not know, do not realize, or choose to ignore is that an NFA may only be a temporary reprieve from additional remediation work at the discretion of Oregon’s Department of Environmental Quality (“DEQ”) or Washington’s Department of Ecology (“DOE”). Both DEQ and DOE may reopen an NFA.
DEQ is charged with reviewing files every five years. The reasons given for reviews every five years include making sure that the situation is still stable, that there is no new technology that could otherwise detect the previously undetectable, and other similar reasons. The DOE also has stringent standards. In one particular case an NFA was not granted by the DOE because, even though they could not detect any further environmental hazards, they wanted to wait until better detection techniques were developed in the future.
While lenders and brokers may want an NFA, that’s not where the story ends. It is very much up to the buyer of a formerly contaminated property to make sure that the property’s future uses are disclosed and discussed, because real danger may exist in a change of use of the property. NFA or not, the due diligence process is extremely important in saving a prospective purchaser from the many problems that lurk on a previously contaminated property.
If the planned use of the property is similar to its previous uses or even less intense in nature, then the purchaser should be just fine with the NFA. However, if the planned use of the property is significantly different than the most recent use of the property, the purchaser can inadvertently enter into a real quagmire if the due diligence process is glossed over. A significant change of use will cause both state agencies to reexamine their previous NFA determination to see if further investigation may be needed. The two state agencies may also reopen or revoke an NFA if the NFA had conditions related to the anticipated uses and the proposed use is different altogether.
A simple example of the types of issues that can arise with a use change includes a commercial office space with a former gas station on the corner. Assuming that the gas tanks leaked and most of the contaminated soil was removed, a seller will likely get an NFA to continue with the commercial building on the site. But what if the buyer wants to change use of the property from the commercial building into condominiums with an underground garage? Test results needed to get the NFA for the commercial building on the property may not be sufficient for such a change in use. Acceptable levels of contaminants for one use will be different than for another.
It is important that the buyer get a copy of the NFA file from the respective state agency in order to determine if the NFA will be sufficient for their intended use. The buyer should also employ an environmental consultant to help sort through the issues long before the closing date of any sale and perform an independent Phase I (and possible Phase II) assessment of the property in advance of closing.
A buyer can save themselves money, time, and grief by closely examining all environmental concerns with a property, including scrutinizing any NFA. And buyers should be ready to walk away if they are not satisfied with what they find, instead of paying minimal attention to the potential environmental issues before them.