If you buy property with environmental issues, you may be liable — even if you weren’t 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 avoid buying properties that expose them to potential liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). CERCLA rules may result in fines — and even 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 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 samples to determine if contamination is indeed present.
If you decide on a Phase I assessment and want to pay for this with EPA Brownfields Assessment Grant funds, you’ll need to conduct it in accordance with the All Appropriate Inquiries (AAI) rule. The rule requires, among other things, 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 such factors as 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 might encompass issues such as asbestos, lead-based paint, radon, mold, floodplains and ecological factors (for example, 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 doesn’t seem vulnerable. Thorough due diligence procedures can help identify potential CERCLA liability risks and put you in a stronger negotiating position.