What is Environmental Due Diligence and Why Do You Need It?

When in the middle of a commercial real estate transaction, you may suffer from unexpected environmental liabilities that can cost up to millions of dollars in extreme cases. If you want to purchase, sell, lease or refinance a property, then you’ll want to practice environmental due diligence to effectively avoid liabilities and manage risks associated with these processes.

Environmental due diligence is a formal process that looks closely at real estate for possible environmental risks, including contamination of groundwater or soil. The Environmental Protection Agency (EPA) has developed specific standards for due diligence, and environmental professionals determine the type and extent of assessment needed, which will depend on the property.

Risk of Cost Liability

The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) details a process that determines which party is liability for hazardous substances. Regulators are required to fine property owners and order the removal of hazardous materials, even if the owner isn’t necessarily responsible for the contamination.

environmental due diligence

This could be extremely costly, as some remediation projects can result in millions of dollars in expenses.

How Due Diligence Can Protect Property Owners

Thorough assessments can mean the difference between millions of dollars lost and complete protection from liability. Most due diligence audits begin with a Phase I Environmental Site Assessment (ESA). This ESA assesses the current and previous use of the property to determine if there are any environmental risks, and ensures compliance with the CERCLA.

In addition to CERCLA compliance, ESAs should also follow any laws established by local, state, or federal regulations. One of the best ways to avoid an issue is to hire an environmental consultant, who will know exactly what to do to properly assess the property and meet all compliance requirements. Anything overlooked could mean that you spend much more than you would otherwise need to.

Doing What You Can with Environmental Due Diligence

Apart from liability protection and technology, due diligence is a great tool for buyers, as they can make sure they get the best investment value for property while structuring their acquisition based on what the assessment uncovers.

For example, if contamination is found on a property, the buyer can negotiate a commensurate reduction in the cost of the property or ultimately decide not to purchase it.

Sellers

Sellers facing the realization that the property is contaminated may also be able to mitigate reduced sale value and the cost of remediation by locating previous insurance policies that don’t contain a pollution exclusion.

In the end, environmental due diligence can make selling and buying or leasing a property far easier and cost-effective in the long run. It’s important to make sure that your property accounts for all potential contamination through an assessment. The best way to get the most out of due diligence is to work with an environmental consultant who can make this even easier for you, helping both sellers and buyers ensure that due diligence is performed properly from beginning to end.

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