USTS in Transactions (Part 1: LUSTS)

Sunday, May 8, 2016

By: Mike O’Connell, P.G.

Underground storage tanks (USTs) are a common environmental concern in property transactions and require a great deal of consideration depending on the status of the tanks, whether or not there has been a release, intended use of the site, etc. When a site is identified as having previously operated or currently operating USTs, it will commonly be considered a recognized environmental condition (REC) during a Phase I environmental site assessment (ESA) and will require some resolution or risk consideration.

An active leaking underground storage tank (LUST) incident at a site can be a deal killer, but it does not have to be. Because so much is known about LUST assessment and remediation, many consultants can make fairly reasonable cost estimates for achieving regulatory closure that can be worked into a closing deal. If the responsible party (RP) is financially stable, liability for the release can also be retained and remediated by the RP.

Some LUST incidents are also eligible for funding of cleanup activities from a state petroleum trust fund. If a LUST cleanup is currently being funded by the state, transfer of that eligibility is typically just a matter of filling out a few state forms. If the LUST was recently discovered during the transaction due diligence (i.e., Phase II ESA), a prospective purchaser may want to request that trust fund eligibility be checked before agreeing to a deal. It should be noted that timely release reporting as well as UST system compliance (operational and administrative) are usually critical components of trust fund eligibility, and a failure in one of these areas at the time of the release report can jeopardize eligibility.

Sometimes a “closed” LUST incident is identified at a site. If an incident has been granted a regulatory closure or “No Further Action” (NFA) status by the governing agency, it is commonly considered a historical recognized environmental condition (HREC), which is more benign than a REC and usually will not prompt much further investigation. However, consider that NFA status is not necessarily a permanent condition. Most NFA letters contain “reopener” language that may be used by an agency to reopen a release in the future if petroleum contamination is discovered under different conditions than those that existed or were known at the time of the NFA. In many cases, further diligence in reviewing state records and the conditions at closure may be warranted to determine the potential for encountering residual contamination during site redevelopment or other activities.

Similarly, a LUST incident may have been granted an NFA based on very specific site conditions, restrictions placed on the use of the site, or some other engineering control (e.g., concrete cap, vapor mitigation system, etc.). These types of conditions are generally identified as a controlled recognized environmental condition (CREC). Maintaining such controls, generally in perpetuity, is an important consideration for prospective purchasers of such a property.

This is only a brief overview of some of the conditions that may be encountered in a transaction involving LUSTs and some consideration that should be given these sites. Part 2 will focus on transactions involving active UST systems. Contact Mike O’Connell of PSARA at (513) 791-4418 or mpoconnell@psara.com for more information about PSARA’s due diligence and UST services.