The Smart Seller
Pre-market Positioning Ensures a Smoother Landing
April 28, 2015
You have a prospective purchaser on the line, but they are insisting on conducting extensive testing of the soil and groundwater. You are pretty sure it won’t uncover any environmental issues, but the asset is located in a jurisdiction where all groundwater sample data must be submitted to the regulators. How do you get your purchaser comfortable with the acquisition in the absence of intrusive testing, while also avoiding a potential stigma for the property?
This type of sticking point arises in a great many, if not the majority, of acquisitions involving real property, and often gets dealt with on-the-fly as the “go hard” date looms. Compromises get made, feathers are ruffled, and bad faith is surmised. While such scenarios cannot always be avoided, with a little planning and strategic positioning in the pre-marketing period, consternation and maneuvering can be minimized, and price compromises avoided.
The following is a list of steps to consider. When incorporated into company practices, they can result in smoother divestments:
- Whenever feasible, make it a standard operating procedure to meet CERCLA’s All Appropriate Inquiries (AAI) at the time of your acquisitions to establish yourself as a Bona Fide Prospective Purchaser (e.g. conduct appropriate level of due diligence, Phase I, etc). When you can demonstrate that you undertook the AAI process for your own purchase of the asset, even if several years prior to your planned divestment, it provides a strong benchmark for your prospective buyer, by (i) establishing a solid baseline for site conditions, and minimizing unknowns; and (ii) showing you understand the importance of risks posed by environmental conditions and stewardship practices.
- Try to maintain environmental, health and safety (EHS) documents relating to the property and its operations in an organized fashion, including copies of any tenant EHS documents, permits, regulatory correspondence, audits, prior Phase I environmental site assessments (ESAs), etc. Proactively providing a carefully curated selection of documents to prospective purchasers will show good stewardship, and go a long ways in establishing confidence in the prospective purchaser. Being organized in this fashion also aids in the disclosure of any potential issues, thereby minimizing the risk for a breach of rep in your divestment process.
- As soon as possible following the decision to divest, but before placing the asset on the market, conduct your own internal audit of the property and/or asset to evaluate its compliance status. It also pays to review the public EHS databases using an on-line service such as EDR so that you are aware of any deficiencies at or near the property prior to listing it for sale, because your prospective purchaser will also have access to this same information. You are then in a position to either address/correct any deficiencies and/or to proactively explain them to the prospective purchaser. Allowing a prospective buyer to discover such information on their own leads to numerous time-consuming diligence requests and, often times, to a price break request. Establishing that you are aware of any EHS shortcomings of your asset at the time of listing indicates that such shortcomings are already a part of the sale price calculus.
- Existence of an environmental liability insurance policy for the asset is an excellent means of establishing buyer comfort because insurance companies will evaluate liability risks prior to issuing a policy, and price the premium accordingly. This provides evidence of an additional layer of review that a property has previously undergone. Existence of an insurance policy also provides comfort where the history of claims is minimal or non-existent.
The foregoing is a partial list of the types of practices that business entities should consider incorporating into their general operating procedures. Doing so will lead to less costly, smoother divestments and help maintain pricing leverage.
In a situation where you wish to forestall intrusive testing on your property, a key is being able to demonstrate that you are “on top of” the environmental, health and safety aspects of the operation, which can be done by conducting the Phase I investigation for the purchaser(s) and thus controlling that process, and also by proactively providing EHS documents pertaining to the property. This often short-circuits the diligence process.
For tailored solutions to your thorny negotiations and proactive positioning in relation to your environmental, health and safety matters, contact Tellus Law Group. We will be happy to talk through your specific situation and help craft a strategy that helps optimize your position.