The Importance Of Environmental Due Diligence When Purchasing Commercial Properties

Environmental due diligence is extremely important when planning any new building or purchasing an older one. The environmental impacts on the natural site must be studied, along with the potential effects the new building may have going forward.

Joseph Rizzuto, an experienced real estate developer from New York, highlights the importance of environmental due diligence when planning a new commercial or residential real estate project.

Environmental due diligence

What is Environmental Due Diligence?

Environmental due diligence (EDD) is a regulatory process which determines whether real estate carries risks to the natural environment, including groundwater and soil contamination. The Environmental Protection Agency (EPA) is in charge of environmental due diligence, and the process laid out by the agency must be followed.

Due diligence is required when all types of real estate are bought, sold, or leased. If due diligence is not properly taken, property owners may find themselves in danger of costly lawsuits and fines. Even if you did not cause the environmental damage, you could be liable for it under the laws of the United States.

How Does the Process Work?

The environmental due diligence process begins with a Phase I Environmental Site Assessment or ESA. A Phase I ESA researches the past and current uses of a property before a commercial real estate transaction can be completed. Environmental impacts on the soil or groundwater are carefully studied, and a remediation plan is created that will provide for the health of the site going forward.

Performing a Phase I ESA can help to satisfy the requirements of the CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act) defense for innocent landowners. If environmental damage is found to have happened in the past, before the current owner had control of the property, the Phase I ESA will protect the buyer from liability.

During a Phase I ESA, regulators visit the site to determine its use and any problems that may come from adjacent properties. Regulatory databases are reviewed that determine the placement of fuel storage tanks above and below ground, the storage and disposal of hazardous substances, and engineering controls.

Historical records are reviewed, examining the history of the site as much as possible. Aerial photos, city business directories, and historical maps may help the environmental regulators to gain a clear picture of the property in question.

The EPA will also interview the current owner and those who have owned the property in the past, attempting to gain a complete picture of what the site has been used for. The EPA’s interviews will include the prospective buyer as well, discovering what the new owner plans to do with the site once the sale has been completed.

Which Types of Use are Most Concerning?

Any site which has housed a business dealing with polluting chemicals is of particular concern. However, environmental concern is not limited to these businesses. Types of businesses which are at risk for contamination include gas stations, dry cleaners, vehicle repair shops, printers, and manufacturers.

Commercial property

Are There Any Special Requirements?

The Small Business Administration, U.S. Department of Housing, Fannie Mae, and Freddie Mac, all of which are lenders, have special requirements for Phase I ESAs. Make sure that your environmental consultant is aware of these special requirements before the process begins. It is also smart to check with other lenders, who may also have their requirements to take into consideration.

What Happens When the Assessment is Complete?

When the Phase I assessment is completed, the EPA will make recommendations about any types of contamination found at the site. If there are existing problems, the EPA will provide steps that the property owner can take to remediate these problems. If the site is more complex, a Phase II ESA will be ordered.

The Phase II ESA

Phase II is a more comprehensive environmental assessment which is used when there are known areas of concern. Local geology, site access, chemicals of concern, and areas of concern will all be taken into consideration. The geologic testing at the site will be more comprehensive than that required by a Phase I ESA. The soil will be drilled, and the gas in the soil will be sampled.

Why is Due Diligence Important?

Beyond the issue of financial liability for a contaminated site, it is important that all environmental damage is contained and remediated. This will benefit the local ecosystems, the groundwater at the site, and the health of people, plants, and animals in the area. Environmental due diligence is worthwhile in itself, though the site assessment and remediation can be costly.

Joseph Rizzuto encourages all prospective property buyers to look into possible environmental damage and to have the problems evaluated professionally. This will help to reduce liability, ensure that loans can be arranged, and protect the environment for future generations.