Special-purpose properties often call for specialized environmental due diligence because the most significant risks aren’t always the most obvious ones. They may be buried deep underground.

Here are five special-purpose property types that call for extra environmental due diligence:

Dry Cleaners

The common use of perchloroethylene (PCE) and other volatile organic compounds (VOCs) in dry cleaning has been blamed for potentially significant human health impacts. Due to past disposal practices, these compounds often end up in the soil and groundwater, resulting in contaminated adjacent properties, compromised drinking water, and vapor intrusion.

According to studies conducted by the Environmental Protection Agency (EPA), the State Coalition for Remediation of Dry Cleaners (SCRD) and others, an estimated 75% of dry cleaning facilities currently in operation (more than 15,000 sites) experienced releases of dry-cleaning solvents significant enough to create contamination requiring investigation.

The costs of a single cleanup can be significant, ranging from $500,000 up to $1.5 million or more. In fact, one notorious site in East Trenton, NJ is being remediated at a cost of nearly $2 million. That’s a lot of starched shirts!

Fortunately, several states, including Alabama, Connecticut, Florida, Illinois, Kansas, Missouri, North Carolina, Oregon, South Carolina, Tennessee, Texas, and Wisconsin, have established dry cleaner remediation programs to help offset some cleanup costs. Talk with your environmental consultant to help identify potential funding that may be available.

Gas Stations & Convenience Stores

Petroleum-based businesses are notorious for the leakage, spillage, and migration of volatile organic compounds. A small release can potentially cause groundwater contamination, which could trigger substantial investigation and remediation costs. Another major concern with gas station properties is legacy underground storage tanks (USTs).

Lenders must conduct full due diligence on any site with current or past use as a gas station or related business. First, make sure to conduct a comprehensive environmental survey, beginning with a Phase I environmental risk assessment (ESA). A proper assessment will consider the environmental history of the site and if needed, will recommend a Phase II that would include soil samples and a study of the underground property.

Lenders should also research whether other environmentally sensitive services (like car wash or auto repair) have ever been offered at the same location.

Additionally, it is good practice to check on the existence of open environmental litigation involving any current or past owners of the property. Your state Department of Environmental Protection should maintain public files of any active investigations or legal actions.

Auto Repair Shops

Because they don’t typically house large quantities of fuel (as compared with gas stations), auto repair shops often get overlooked as potential “hot spots” of environmental risk. That can be a mistake.

To the casual observer, these properties may appear low-risk, but decades of vehicle maintenance activities can create significant contamination concerns.

Auto repair facilities often house a variety of hazardous substances on site, including waste oil, synthetic and petroleum-based lubricants, hydraulic fluids, transmission fluid, and antifreeze. Auto mechanics and body shops also use various cleaning agents and solvents, as well as specialized paints and coatings.

Among the most concerning environmental risks inherent to these properties are inadequate waste oil and fluid disposal, floor drains connected to unknown disposal systems, and historical USTs.

Whereas a Phase I ESA is a prudent starting point for auto repair shop properties, lenders should ensure the consultant specifically evaluates:

• Historical and current waste oil storage practices
• Presence of underground or aboveground storage tanks
• In-ground hydraulic lifts
• Oil-water separators
• Dry wells and floor drain discharge locations
• Hazardous waste manifests and disposal records
• Historical aerial photographs showing prior uses
• Evidence of staining, distressed vegetation, or undocumented dumping areas

Obtaining documentation of historical waste disposal practices is particularly important because contamination can occur from years of small releases rather than a single catastrophic spill.

Agricultural Properties

If you lend in a primarily rural market, you likely serve an agricultural borrower base. Although they may appear idyllic to the uneducated eye, farms and agricultural production facilities can potentially hide deep environmental problems.

The challenge is often not industrial contamination, but decades of chemical use and storage. This is because historical chemical handling practices may have occurred long before modern environmental regulations were introduced.

Key environmental risks include pesticide and herbicide storage, fertilizer contamination, USTs, agricultural chemical mixing sites, and concentrated animal feeding operations (CAFOs).

For agricultural properties, lenders should start with a Phase I ESA, which commonly include an investigation of pesticide and fertilizer contamination, fuel storage tanks, agricultural waste management practices, and potential groundwater impacts. A Phase II should be considered when the Phase I identifies historical pesticide mixing or loading areas, former chemical storage areas, USTs, evidence of spills or leaks, and groundwater concerns.

The USDA’s environmental review guidance specifically notes that when contamination is identified through testing, additional investigation and remediation planning may be required before a property is considered suitable collateral for a loan.

Manufacturing Facilities

Properties that feature manufacturing activities offer a special type of risk, since the term “manufacturing” can mean many different things. It may refer to a machine shop, metal plating operation, plastics manufacturer, electronics assembler, or textile mill, to name just a few.

Like with agricultural properties, the challenge with factories and production facilities isn’t solely with current operations—it’s often uncovering decades of previous industrial uses that may have left behind contamination.

Key environmental risks with manufacturing facilities include improper hazardous materials storage (including historical USTs), the use of industrial solvents and degreasers, acids and caustics, paints and coatings, inadequate waste handling practices, and unknown historical operations.

For manufacturing properties, lenders should customize the Phase I ESA to thoroughly evaluate potential risks based on the unique current and historic uses of the facility. Investigations should examine:

• Prior operators and tenants
• Historical aerial photographs
• Sanborn maps and city directories
• Regulatory database listings
• Hazardous material storage areas
• Waste handling and disposal practices
• Historical permits and enforcement actions

Note that ASTM standards place significant emphasis on reviewing historical records to identify past industrial activities that may have created environmental liabilities. Often, the greatest environmental risk is in the historical record, not current operations.

Comprehensive Investigation is the Answer

Lenders and property owners may have other options beyond full remediation at their disposal if site contamination is discovered. The use of deed restrictions and covenants may allow a certain level of contamination to stay in place if the property use is restricted to activities with a low risk of exposure. Although such restrictions are use-limiting and may impact a property’s market value, they can help reduce the cost of cleanup significantly.

Special-purpose properties present a special due diligence challenge for lenders. But that doesn’t necessarily mean you should shy away from using these properties as collateral on a commercial loan. However, we do urge you to consult with a qualified and experienced environmental risk management professional to ensure a comprehensive investigation of all potential environmental risks.