Today, environmental concerns are widely recognized, but they have been a critical issue in commercial real estate for over fifty years. Hazardous and toxic chemicals from spills and disposal practices have seeped into soil and groundwater, leading to contamination. This contamination can compromise drinking water, affect indoor air quality, and spread to neighboring properties.
When it comes to commercial real estate, ensuring environmental due diligence is not just a best practice—it's a necessity. Environmental due diligence refers to the process of assessing a property for environmental risks and liabilities before finalizing a transaction. This crucial step helps stakeholders identify potential issues that could have far-reaching financial and legal consequences.
By conducting thorough evaluations, buyers, developers, and investors can make informed decisions, often mitigating the impact of contamination and protecting the health and safety of future occupants. In this resource, we will explore the importance of environmental due diligence in commercial real estate transactions, the key components involved, and how it plays a pivotal role in safeguarding both investments and the environment.
What is Environmental Due Diligence?
Environmental due diligence (EDD) refers to the investigation and assessment of potential environmental risks and liabilities associated with a commercial property. The process involves identifying any environmental issues that could impact the value, usability, or liability of a property. For real estate investors and agents, EDD is a critical step in ensuring that investments are sound and free from unforeseen environmental complications.
Environmental due diligence is not just a regulatory compliance task; it's a proactive measure to protect investments and ensure sustainable business practices. Proper EDD can prevent significant financial losses, legal liabilities, and reputational damage by identifying and addressing environmental concerns early in the transaction process.
LandGate's LandApp tool can help with initial environmental due diligence through its industrial contamination maps and risk indexes:
What is Environmental Due Diligence in Commercial Real Estate?
An environmental assessment is a thorough examination of a property to determine if any environmental contamination exists or if there are conditions that could lead to contamination in the future. The purpose of the assessment is to identify potential environmental issues that may require remediation or could affect property value and usability.
Environmental assessments typically include:
Historical Research: Reviewing past property uses and adjacent properties to identify potential sources of contamination.
Site Inspection: A physical examination of the property to look for signs of environmental issues such as chemical spills, underground storage tanks, or hazardous materials.
Interviews and Records Review: Gathering information from current and past property owners, neighbors, and local agencies about the property's history and any environmental concerns.
Sampling and Testing: Collecting soil, water, and air samples to test for contaminants.
Professional environmental consultants or firms usually carry out these assessments to ensure thoroughness and accuracy.
Why is Environmental Due Diligence Important?
When planning to purchase or lease a property, conducting a thorough environmental due diligence assessment is a prudent way to protect yourself from avoidable risks. Often mandated by financial and lending institutions, this essential step helps mitigate liabilities, reduce risks, and prevent unnecessary expenses by identifying potential environmental issues.
Environmental due diligence is important because it is a proactive approach to managing environmental risks. As a crucial liability protection measure, it helps reduce risks and avoid unnecessary costs by identifying potential environmental liabilities and if a property is contaminated. Unfortunately, many projects falter or face delays due to lawsuits, fines, and remediation efforts when proper environmental due diligence is overlooked. Without it, you may remain unaware of the environmental liabilities you could inherit.
Under federal and state environmental laws, real estate owners can be held liable for the entire cost of cleaning up existing contamination, regardless of their involvement in causing it. This liability can arise even if the contamination resulted from permissible activities under older, less stringent environmental laws. Before the 1970s, operational practices that could lead to contamination were often unregulated. Furthermore, a property owner who discovers contamination after purchase cannot evade responsibility by merely selling the property.
Environmental assessment is also an important part of corporate due diligence. The due diligence in business circumstances refers to organizations practicing prudence by carefully assessing associated costs and risks prior to completing transactions, part of which includes purchasing new properties.
What are the 4 Phases of Environmental Due Diligence?
There are 4 phases of environmental due diligence. Understanding these phases and their nuances are imperative for lenders, buyers, and prospective commercial property owners to make informed decisions.
Phase I: Environmental Site Assessment (ESA)
The first phase involves a preliminary evaluation of the property to identify any potential environmental liabilities. This phase includes:
Site visits
Examination of historical records
Interviews with current and former property owners
Review of regulatory databases
The goal of a Phase 1 report is to determine if there are any areas of concern that require further investigation. A recognized environmental condition (REC) indicates either known contamination or the potential for subsurface contamination. When a REC is identified, it usually prompts a recommendation for a Phase II Environmental Site Assessment (ESA).
Phase II: Subsurface Investigation
If Phase I identifies potential environmental issues, Phase II involves more detailed testing to assess the extent of contamination. This phase may include:
Soil sampling
Groundwater testing
Indoor air quality testing
The results from Phase II help determine the severity and scope of the contamination and whether remediation is necessary. In Phase II environmental site assessments, the most commonly tested compounds include petroleum hydrocarbons, pesticides, heavy metals, asbestos, solvents, and mold.
Phase III: Remediation and Cleanup
Phase III focuses on developing and implementing a remediation plan to address the identified environmental issues. This phase might include:
Soil removal
Groundwater treatment
Hazardous material disposal
The remediation plan must adhere to local, state, and federal environmental regulations. These regulations, which govern activities impacting the environment, fall under federal and provincial jurisdiction and can vary by region. Determining responsibility for contamination often involves complex and time-consuming guidelines.
Phase IV: Monitoring and Closure
The final phase involves ongoing monitoring to ensure that the remediation efforts are effective and that the site remains free of contamination. This may include periodic testing and reporting to regulatory agencies. Once the site meets all the environmental standards, it can be officially closed and deemed free of environmental liabilities.
How to Conduct an Environmental Assessment for Commercial Property
Environmental due diligence is an essential process for real estate investors and agents involved in commercial property transactions. Conducting thorough environmental due diligence helps identify potential issues, mitigate risks, and ensure compliance with environmental regulations. Be sure to thoroughly investigate any risks to determine the presence of contaminants and the financial implications they may carry before finalizing a purchase. Furthermore, consider engaging environmental consultants, experienced attorneys, and seasoned commercial realtors, as they can provide valuable guidance throughout the environmental due diligence process.
Environmental due diligence for commercial properties typically starts with a Phase 1 environmental report. Getting a Phase 1 report requires time and money, so it is helpful to research potential property contamination risks on your own first before determining if a commercial property of interest is worth further investigation and an investment into a formal Phase 1 report.
Commercial property investors can conduct this initial research by utilizing LandApp's contamination data, which is provided for the entire U.S. LandApp's contamination data includes the location of Superfund sites, contaminated sites, abandoned wells, and underground storage tanks, along with an industrial contamination risk index for every property that is compared side-by-side to state and county averages.
