Many creditors are utilizing receiverships to protect their assets when dealing with many properties, maybe most notably gas stations and convenience stores. A few items we have seen in 2008 through 2010 include the lack of understanding of how underground storage tank (UST) insurance influences property and business value. Since appraisals directly exclude environmental implications the influence of insurance is, in our experience, a largely neglected aspect in managing environmental risk, especially as this risk affects property value.
Although state and federal law require a financial assurance mechanism (e.g., insurance), it is not uncommon for owners to let environmental insurance lapse. Once insurance lapses on a site with USTs, it can be difficult to get the USTs re-insured. This may be due to pre-existing contamination, a site closure using soil or groundwater restrictions, or the type and age of the UST system. Although common on newer stations, double-walled USTs are not required at operational gas stations, thereby complicating or eliminating the ability to conduct a Baseline Environmental Assessment (BEA). The lack of insurance requires a prospective purchaser to incorporate likely environmental cleanup into the purchase price. Typical reductions in purchase price range from $50,000 to $300,000.
Example of Effect of Due Diligence on Ultimate Sale Price
|
|
Value/sales price* |
|
Original Purchase Price (circa 1999) |
$550,000 |
|
Value in 2004 at time of loan |
$600,000 |
|
Current appraised value, as operating station |
$350,000 |
|
Sale price with purchaser assuming environmental liability |
$150,000 |
|
Value after documenting a release but utilizing environmental insurance to mitigate contamination |
$300,000** |
* Values are based on experience and are only for illustrative purposes.
** Reduction in value reflects additional testing, deductibles and legal expenses.