Environmental issues and concerns are a part of many real estate transactions. Phase I and II Studies, Disclosure Reports, No Further Action Letters, and the like are all common place. Buyers and Sellers have grown accustomed to this red tape, but what happens when an unexpected environmental issue arises and threatens the deal? One creative solution I have utilized to salvage a deal: escrow accounts.
Below are two examples of how escrow accounts saved the day when environmental issues caused trouble. Hopefully these will help illuminate ways to protect yourself and your deal if you are ever faced with a similar situation.
The Seller of a 220-unit apartment complex failed to disclose the existence of an underground storage tank, a fact that was brought to light just two weeks before closing. The Buyer scrambled to order a Phase II Environmental Study, and when the results came back, just days before closing, it wasn’t good news…a major oil leak, which would result in a costly clean up. The deal was in jeopardy, so I suggested the Seller, place $150,000 in escrow to pay for the cleanup. This gave the Buyer confidence that the funds would be there to mitigate the issue after closing, and the Seller knew that any money left over in the escrow account after the clean-up would be released back to them. Without this creative solution, the deal surely would have fallen apart just days before closing.
Similarly, I represented a Buyer who was purchasing a 30-acre junkyard to redevelop. The Buyer knew that there was an active gas pump on the site and asked that it be removed prior to closing. Unfortunately, the Seller did not have the means to pay for this work. The solution…an escrow account! The Buyer agreed to allow the Seller to escrow proceeds from the sale in order pay for removal of the gas pump. Here again, the Buyer had confidence the work would be completed after closing, and the Seller was able to pay for the work with funds from the sale, something they could not have done otherwise, which likely would have cost them the sale!
The thought of escrow accounts doesn’t sound particularly exciting, but there is certainly plenty of excitement to go around when the use of an escrow account saves a deal from an ugly environmental issue. Using a mundane tool like the escrow account to resolve what could be an insurmountable problem is the definition of a win-win solution for both the Buyer and the Seller, which is something anyone involved in commercial real estate can get excited about!