Considering Lending on a Dry Cleaner?

by | Sep 14, 2017 | Assessments, Guides

Perchloroethylene (PCE), a chlorinated solvent, has been used in the dry-cleaning industry since the 1930s. A small amount of this “likely human carcinogen” released to the subsurface can impact soil and groundwater, and migration of vapors associated with a release can result in indoor air quality issues. With approximately 85% of dry cleaners nationwide still using PCE in onsite dry-cleaning operations, banks are frequently asked to consider properties that have been occupied by a drycleaner as collateral for a loan.

Prudent lenders want to understand the environmental risk associated with these properties by ensuring that the proper level of environmental due diligence is conducted.

Most ERI client banks require a Phase II subsurface assessment to determine if a property is contaminated with dry-cleaning solvents when a dry cleaner using PCE has operated on the property for 5 years of more. This is a requirement for approximately 85% of ERI client banks. This is also a requirement of the U.S. Small Business Administration. The remaining 15% of ERI client banks require a Phase II if a dry cleaner using PCE operated on the proposed collateral for 2 to 3 years.

However, if a site audit reveals that business operations exhibit poor attention to good housekeeping practices, inadequate solvent inventory recordkeeping or there is evidence indicative of a prior release, a Phase II will likely be required, regardless of the duration of operations.

Many ERI client banks do not have hard guidelines for dry cleaners that claim to have never used PCE. Whether to require a Phase II for a non-PCE dry cleaner generally depends on business operations, compliance history, age of equipment, use of secondary containment and to a lesser extent on years of operation. Even when PCE is not used in the dry-cleaning machines, many operators will use products containing PCE for spot cleaning.

“Drop-off only” locations (those locations where clothing is transferred to an off-site facility for cleaning) may use cleaning compounds containing PCE at the drop-off location for spot cleaning. If a business is claiming to have never used chlorinated solvents in spot cleaners, copies of Material Safety Data Sheets (MSDS) may be useful in demonstrating that these cleaning compounds do not contain PCE. However, the lack of such MSDS documentation will not confirm that chlorinated solvents have not been used. If there are questions regarding potential chlorinated solvent use in dry cleaning operations, the bank could request a historical review of dry-cleaning chemical inventory to confirm that non-chlorinated solvents are used in lieu of cleaning compounds containing PCE.

Planned property use is an important consideration when dealing with a former dry cleaner.

In addition, to site specifics such as years of operation, groundwater depth, gradient and planned property use is also an important consideration when dealing with a former dry cleaner. For example, if a day care center, school or residences are planned for a former dry-cleaning space, then a Phase II will likely be required regardless of the number of years the dry cleaner operated. The details of the transaction also play a role in determining whether additional assessment is required. For example, if the bank is considering foreclosing on the property, a Phase II may be required regardless of the number of years PCE was used onsite.

Site conditions can dictate Phase II sampling locations.

In cases where a Phase II is required by the bank, sampling is usually desired near dry cleaning equipment, in waste storage areas, at floor drains, along sewer lines, at the back door, dumpster, and downgradient of the facility, with both interior and exterior samples being part of the scope. The preferred sampling media includes soil and groundwater. Soil vapor sampling is required in situations where there is a vapor concern.

Site conditions can dictate where samples are collected. Sample locations can be influenced by the presence of utilities, depth to groundwater and surface topography (since surface topography can be a subdued replica of subsurface groundwater features). If the building covers the entire property, then interior borings will likely be required.

Once the Phase II has been completed and the property is determined to be contaminated, the bank will need a plan, time-frame and cost-estimate for remediating the property and obtaining regulatory closure.

This information may come from the Phase II consultant, may be based on the Bank’s Environmental Risk Manager’s experience in dealing with similar properties or a combination of the two. This information is typically used to establish a reserve, mitigate the risk using some other method or to make a decision regarding whether to accept the property as collateral.