If you buy property with environmental issues, you may be liable, even if you were not responsible for the presence of contaminants. To best protect yourself, be sure to include environmental review as part of your due diligence.
Why Conduct Environmental Due Diligence
The most obvious reason investors conduct environmental due diligence is to know what potential liability exists under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and to calculate the remediation cost into the purchase price. CERCLA rules may result in fines and require you to remove hazardous materials at your own expense.
If environmental due diligence exposes previously unforeseen issues, an appraiser may reduce the property’s value. This could prompt a buyer to renegotiate the purchase price or abandon the deal altogether. A buyer could also be alerted to the need for environmental liability insurance coverage.
How to Conduct Environmental Due Diligence
Depending on the property and transaction involved, due diligence procedures might include environmental questionnaires, transaction screens or internal environmental screens. Common types of environmental site assessments (ESAs) include:
- Phase I ESA
Here, the expert (often an environmental engineer) generally examines a property’s past and current uses to identify any environmental conditions that might pose a liability.
- Phase II ESAs
These assessments delve deeper by, for example, collecting and analyzing soil and other samples to determine if contamination is present.
If you decide on a Phase I assessment and want to pay for this with EPA Brownfields Assessment Grant funds, you will need to conduct it in accordance with the All Appropriate Inquiries (AAI) rule. The rule requires site reconnaissance, records review, interviews and documentation of any identified environmental conditions.
Comprehensive due diligence could also go beyond the scope of a Phase I assessment to consider business environmental risk. ASTM International Standard E1527 defines this as “a risk which can have a material, environmental or environmentally-driven impact on the business associated with the current or planned use of a parcel of commercial real estate.” This may encompass issues related to asbestos, lead-based paint, radon, mold, floodplains and ecological factors, such as the presence of wetlands or endangered species.
Why You’re Better Safe Than Sorry
Proactive real estate investors always conduct some level of environmental due diligence, even if a property does not seem vulnerable. Thorough due diligence procedures can help identify potential CERCLA liability risks and put you in a stronger negotiating position. However, the value of the findings is only as good as the expert you hire. Conduct a serious review of the expert’s credentials and understand any signed agreements in case future issues arise.