Is Contamination A Deal Killer?

The Real Estate Espresso Podcast

Is Contamination A Deal Killer?

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Is Contamination A Deal Killer? – The Dilemma in Due Diligence

Today, we dive into an intriguing case study on due diligence. We will address the must-ask question: Is contamination a deal killer?

A Closer Look at the Situation

Last week, our company signed a contract for a new industrial storage facility near Jacksonville, Florida. The property in question had seen better days. It was once an auto parts salvage yard and sadly, subject to a significant fire outbreak in 2017, causing pollution to the soil and groundwater. Considering the local water table is only seven to ten feet below the surface, this was a potential cause for concern.

The Investigation

In preparation for the purchase, we requested the standard list of due diligence items, including a Phase I and II environmental study. The Phase I report meticulously documented site conditions, yet was purely a paper study with no physical site sampling. Interestingly, the Phase I report stated no issues with neighboring properties, painting a decent picture.

However, a separate engineering firm undertook a limited Phase II study which involved soil and groundwater sampling from 13 selected sites across the property. While vast sections of the ground appeared darker and contaminated (even from an aerial view), the sampling sites seemed, surprisingly, to be the cleanest looking areas. Ultimately, only one borehole showed higher-than-permitted levels of benzene and toluene, casting a shadow of doubt over the entire process.

Phase I Study	Phase II Study
Paper study	Physical site sampling

The Decision Point – Is Contamination A Deal Killer?

Despite the results from the Phase II study stating that the contamination was within allowable state limits for commercial property, we chose to back out of the agreement. The risk, for us, lies in the limited scope of the Phase II examination. To truly ascertain the state of affairs, more extensive sampling is necessary, potentially costing hundreds of thousands of dollars- an investment we were not willing to underwrite.

Even if the property title was offered at no cost, the unlimited risk from a potential lawsuit due to environmental contamination is too significant to consider. As the popular saying goes, sometimes the juice simply isn’t worth the squeeze, and, in this case, the unknown risk due to contamination was indeed enough to be a deal killer.

Conclusion

When it comes to real estate, environmental issues and property contamination are not to be overlooked. Sometimes, costly thorough due diligence ends up saving you from future losses. “Is Contamination a Deal Killer?” a question that briefly does contain the word ‘sometimes’ but in most cases, the liability is infinite.

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