Donated & Dollar Properties: Risk Considerations for Buying or Accepting Unknown Properties
Introduction. Each year, Colorado municipalities acquire properties that are either donated or purchased with a minimal transaction cost, often referred to as dollar properties. Examples include schools, theatres, factories, historical buildings, or residences that have been abandoned or are no longer in use.
When municipalities agree to take ownership of such properties, they usually have plans to renovate and use them for the good of the community. This goal, along with the seemingly win-win cost of the property, may cause you to overlook the potential hazards, or it may not be apparent that anything significant could be wrong with the property. There may be potential perils that should be considered before making the purchase or accepting the property as a donation.
Environmental, Health and Safety Hazards. Some common scenarios that can result in costly and unplanned repairs or remediations are as follows:
- A town obtains a theatre that has only one accessible exit, not meeting the Americans with Disabilities Act (ADA) accessibility requirements established in 1992.
- A city obtains an abandoned school that has asbestos and lead paint.
- A town is donated an abandoned commercial facility that formerly housed a dry-cleaning operation or sits on ground that houses underground storage tanks and consequently has petroleum distillate vapors entering nearby structures and possibly affecting patrons.
Why do these potential hazards exist? Some background may help explain why:
Before 1970, neither the Environmental Protection Agency (EPA) nor the Occupation Safety and Health Administration (OSHA) existed. Also, the ADA wasn’t enacted until 1990. This may mean that a property wasn’t built to meet the environmental, health, safety, and accessibility requirements that exist today.
Additionally, underground storage tanks laws were not developed before the EPA came into existence. Subsequently, facilities such as gas stations had to have their tanks removed, at great cost, due to leaking. Some facilities of this type closed without adequate removal of the tanks and remediation of the surrounding grounds. In rare cases, the vapors from degraded underground tanks spread up to one-quarter mile, entering crawl spaces, basements, and other hollow foundation areas.
Similar problems can exist with properties that may have stored bulk chemicals, regardless of whether the chemicals were stored above or below ground. Structures could also contain high levels of lead or asbestos (or both) resulting in significantly high abatement and remodel costs.
Structural and Liability Considerations. Health and safety hazards aren’t the only issues to consider. Should you inherit a building with historical status, the materials similar to those used in the original construction may be required to maintain historical status, making renovations costly to accomplish. Further, older buildings may have general structure defects, may have significant dilapidation or deferred maintenance issues, or may not be built to the structural standards required for repurposing the building to your municipality’s desired use. These types of problems can be very costly to repair and are not covered by insurance as property insurance is designed to respond to direct physical loss or damage from perils such as fire, wind, hail, and other covered causes of loss, and not costs associated with structure defects, wear and tear, deterioration, or similar problems that can exist in older buildings.
In addition, taking ownership of dollar properties can create new potential liability exposures. Under the Colorado Governmental Immunity Act (GIA), a public entity can be liable for injuries to third parties that result from dangerous physical conditions caused by the negligent act or omission of the entity in maintaining a public building. A public entity that acquires a dollar property in disrepair or with structural defects should have GIA protection against injuries not caused by it. But, on the other hand, going forward the entity faces potential exposure for GIA liability for claims based on its own maintenance or lack thereof. The costs of protecting against the risks that can accompany dollar properties acquired in a state of disrepair can be a hidden but significant cost.
Additionally, certain remediation responsibilities under federal and state environmental laws can be imposed on owners of property irrespective of whether contamination was a result of their ownership or operations. Perhaps most famously, the federal Superfund statute provides that any owner or operator of a property contaminated by hazardous substances can be potentially responsible for cleanup costs, even if not responsible for causing or controlling a release.
Some Risk Management Suggestions. Essentially, if a desired transaction appears too good to be true, it just might have some of the above issues and your entity might bear the burden of removing the hazards, or at least spending more money than initially intended. Additional costs may be incurred if renovation or construction unearths and disturbs hazards and contaminants.
There are many other scenarios that could lead to a costly outcome. So, consider the following guidelines in your evaluation of “donated and dollar properties”:
- Hire an environmental consultant to conduct a Phase I Environmental Assessment. For buildings, hire a consultant to conduct a thorough building inspection and structural assessment.
- Ensure the consultant performs a historical review of the property use and use of adjacent properties for at least the past 80 years.
- Obtain a title commitment and conduct an appropriate analysis of title matters to ensure the property is not encumbered by liens or other title matters that may frustrate the desired use of the property or result in unacceptable costs or obligations. Purchase title insurance.
- Have the environmental consultant determine if there are any RCRA (Resource Conservation and Recovery Act) or CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act; commonly known as Superfund) sites that could impact the property of concern. If so, the consultant should obtain status on any cleanup measures of such sites.
- Have appropriate consultants evaluate the site for various hazards and other conditions such as:
- Lead paint.*
- Radon, especially in lower portions of the building and foundational areas.
- Spills of paints, solvents, fuels, or other chemicals that may have occurred inside or outside the building, penetrating through walls, flooring, ceilings, or foundations.
- Water damage through leaks or plumbing that may give rise to structural damage or mold.
- Structural integrity, and the condition of major systems such as roof, plumbing, electrical and HVAC.
- Any other environmental, health, safety, structure, or systems concerns the consultants may have.
If concerns are identified, get full information on the costs of needed repairs or remediation, and on the costs of maintaining and protecting the site from the time you take ownership going forward. Your entity should consider these and other risks and costs before finally deciding whether to close the transaction.
*Note: Personnel/firms that inspect for asbestos or lead need to be certified in the State of Colorado.