Introduction
Environmental due diligence is a crucial step in any real estate transaction, which involves identifying and evaluating potential environmental risks associated with the property, such as contamination or hazardous materials. By seeking the assistance of a qualified environmental consultant, you can navigate this complex process efficiently and obtain a clear understanding of the environmental risks associated with your commercial investment property, thus protecting yourself from potential liability and ensuring the safety of the property.
The Environmental Due Diligence Checklist:
- Phase I Environmental Site Assessment (ESA)
- Review of Historical Records
- On-site inspection
- Interviews with local officials and/or knowledgeable parties
- Phase II ESA (if recommended in the Phase I ESA)
- Soil sampling
- Groundwater sampling
- Cleanup Plan and/or Remediation
- Previous Environmental Assessments or Audits Review
- Checking for Possible Violations of Environmental Law
- Hazardous Waste Disposal
- Underground Storage Tanks
- Review Environmental Regulations
- Flood Protection
- Air and water pollution regulations
Let us delve a little deeper into the Environmental Due Diligence Checklist…
Phase I Environmental Site Assessment (ESA)
One of the key elements of environmental due diligence is a Phase I Environmental Site Assessment (ESA). This is a comprehensive study of the property and surrounding area that should identify all recognized environmental conditions (RECs) that may be present on the property, and to determine if any further investigation is necessary. Some of the studies and reports performed and reviewed during the Phase I ESA include, but are not limited to, the historical records, an on-site inspection, and interviews with local officials and knowledgeable parties. The Phase I should be updated every six months on longer transactions, and it is recommended that a new Phase I ESA is ordered on transactions that extend beyond one year from the date of the initial Phase I.
Phase II Environmental Site Assessment (ESA)
If a potential environmental issue is identified, a Phase II ESA should be conducted. This is a more detailed investigation that includes soil and groundwater sampling to determine the extent of any contamination. Additionally, it may be necessary (or best practice) to obtain reliance letters from the applicable jurisdiction or governing body, and in certain instances peer reviews should be conducted. Based on the findings of the Phase II ESA, a plan for cleanup or remediation may be necessary.
Previous Environmental Assessments or Audits Review
In addition to the Phase I and Phase II ESAs, a thorough environmental due diligence process should also encompass a review of any previous environmental assessments or audits of the property. This review is important as it can reveal any previously identified environmental concerns that may have been addressed or remain unresolved and inform future decision-making by providing greater details concerning a property’s environmental history.
Identify Violations of Applicable Environmental Laws and Regulations
Furthermore, it is crucial to identify all possible violations of applicable environmental laws and regulations (Click here to view Environmental Regulations by State). This can include checking for hazardous waste disposal practices, underground storage tanks, and other environmental liabilities that may exist on the property. Failure to address these potential violations could result in significant financial and legal consequences, so it is essential to conduct a comprehensive check as part of the environmental due diligence process.
While performing the review for possible violations, confirm that the intended use and development plan complies with the applicable environmental regulations, noting this may impact the zoning status of a property. For example, if the property is in a flood zone, there may be specific regulations and requirements related to flood protection and insurance. If the property is used for commercial or industrial purposes, there may be specific regulations related to air and water pollution.
Conclusion
In conclusion, environmental due diligence is a critical step in any real estate transaction. By conducting a Phase I ESA (and Phase II ESA, if applicable), reviewing previous environmental assessments, checking for environmental violations, and considering applicable environmental regulations, investors and purchasers can protect themselves from potential liabilities and ensure that a property is permitted to operate in accordance with the intended use.
The Authors
Jonathan Gilmore
Jonathan is a real estate transactional attorney with over 12 years of experience, who is highly skilled in managing transactions involving land and buildings of every type and nature. Jonathan currently specializes in helping clients buy, sell, lease, finance, and raise capital for real estate deals in the homebuilding, multi-family, manufactured housing and commercial real estate sectors.
