What are Business Environmental Risks to look in Real Estate Transactions

What are Business Environmental Risks to look in Real Estate Transactions

Real estate transactions come with inherent risks and benefits. Whether you’re looking to purchase a new home or are an investor, understanding critical factors such as business environmental risks can ensure that you make a smart move.

Though every real estate transaction will contain a different set of risk factors and liabilities, some will happen to be more pertinent than others. Business environmental risks are one of the more important elements and scope that companies, investors and individuals should consider when making large financial decisions in the world of real estate.

When evaluating any potential business venture – especially in terms of real estate – it’s important to understand the many facets associated with taking things forward. Most noteworthy among these concerns are those associated with business environmental risks. Taking the time to understand what environmental dangers may exist can help prepare you for the worst and plan for disaster-proofing your strategy whenever necessary. In this article we’ll explore key points surrounding business environmental risks that should be taken into account when considering real estate transactions.

When Investing in Commercial Real Estate, It Is Important to Be Aware of These Common “Business Environmental Risks”

When it comes to commercial real estate transactions, corporate counsel should always perform environmental due diligence prior to purchase or lease. A Phase I Environmental Site Assessment is a great tool for assessing and mitigating environmental risk in connection with these transactions. This assessment helps purchasers qualify for the statutory “landowner liability protection” afforded under the federal Superfund law and can detect “recognized environmental conditions” (RECs). An REC is the presence or likely presence of hazardous substances or petroleum products at or beneath the property. If an REC is found, further investigation such as soil or groundwater sampling may be necessary to determine if subsurface contamination is present. When a Phase I report comes back clean, prospective purchasers and their real estate counsel might be tempted to ignore the rest of the report; however, there are still several common but problematic business environmental risks that must be considered. These include asbestos contamination, lead-based paint hazards, underground storage tanks, mold growth, air quality issues, and water contamination. It is important to thoroughly investigate each of these potential risks before entering into any real estate transaction in order to protect both parties involved from potential liabilities down the line.

Asbestos Containing Material (ACM) and Lead-Based Paint (LBP)

These are two of the most common Building Environmental Risks (BERs). Asbestos is a naturally occurring mineral that was widely used in construction prior to 1990. It was used in plumbing, piping, insulation, walls, roofing materials, floor tiles and adhesives. Unfortunately, ACM can still be found in many older buildings today. On the other hand, lead-based paint has been banned in the United States since 1978 due to its toxicity. However, it is still possible to find LBP in older buildings and commercial structures such as water tanks and antenna towers.

It is important to be aware of these BERs when assessing a building for potential environmental risks. If asbestos or lead-based paint is present, it should be removed or contained by a professional contractor who specializes in hazardous material removal. Additionally, proper safety precautions should always be taken when dealing with these materials as they can cause serious health problems if not handled properly. By understanding the risks associated with these BERs and taking appropriate measures to mitigate them, we can help ensure a safe environment for everyone involved.

Historic fill 

It is a type of material that was used to fill in waterbodies, wetlands or land depressions before October 1962. It usually consists of solid waste such as wood and coal ash, incinerator ash, construction debris and land clearing, which can make it highly contaminated. Environmental consultants will flag down historic fill concerns when they notice new land patterns while reviewing historical aerial maps or if property records indicate the application of historic fill.

Advice for dealing with historic fill is that it typically does not need to be cleaned up unless significant excavation is anticipated post-acquisition. If this is the case, disposing of the historic fill can significantly drive up construction costs and impact construction schedules. Therefore, it is important to consider the potential presence of historic fill when planning any excavation projects on a property.

Soil vapor intrusion (SVI) 

It is a serious health risk that can occur when volatile gases, both naturally occurring and man-made, are released into the soil or groundwater. The New York State Department of Health (NYSDOH) and NYSDEC take a conservative approach to SVI concerns and may require extensive investigations to determine the source of contamination. If it appears that the property is not the source, but there is confirmed SVI, they may require a venting system such as a subslab depressurization system (SSDS) or vapor barrier be installed at the building. The installation of an SSDS or other vapor mitigation system can be expensive, costing at least $50,000 to design and install. It is important for property owners to be aware of potential SVI issues in order to protect current and future occupants from any health risks associated with them.

Emerging Contaminants

The issue of emerging contaminants has become increasingly prominent in recent years due to the prevalence of class action lawsuits concerning groundwater contamination, as well as national media coverage. These contaminants include PFAS (per- and polyfluoroalkyl substances) and 1,4-dioxane, both of which have been used in industry for decades but are only now detectable due to advances in laboratory equipment. The USEPA and State agencies are still working on proposing groundwater contaminant limits, with New York State leading the way with proposed rules that would regulate these contaminants at extremely low levels.

Given this situation, it is important for those dealing with potential issues from “emerging contaminants” to consider purchasing additional insurance or a separate pollution premise liability policy to account for the possibility of intrusive and expansive government involvement. Additionally, if possible, obtaining a strong indemnification and hold harmless agreement in favor of the purchaser can help protect against any potential liabilities associated with these contaminants.

Regulatory compliance 

It is an important factor to consider when buying or selling a property. Open “spill” incident tickets, failure to register USTs, not renewing certain permits, and failure to file annual reports/certifications can all lead to expensive violations for the new owner. For example, in New York State, the new owner of a building with a UST system with capacity of more than 1,100 gallons must register all USTs with the NYSDEC within 30 days of closing.

The best way to avoid any potential regulatory issues is for the buyer and seller to agree on addressing all open regulatory issues before closing. If that isn’t possible due to time constraints, then it’s recommended that an escrow account be established funded by proceeds from the sale in order to cover any open regulatory issues. Otherwise, the buyer will be left holding the bag (and headaches) with no recourse.

Climate change 

It is a serious issue that has the potential to cause significant damage to our environment. Rising sea levels, more intense storms, longer dry seasons, and hotter summer months are all likely outcomes of climate change if we continue on our current trajectory. This could have disastrous consequences for those who are unprepared, particularly if they are purchasing waterfront property or property in low-lying flood zones near rivers and streams.

Furthermore, increased energy demands during summer months will put the energy grid at risk, leading to blackouts or brownouts in certain areas. This could be problematic for industries that rely on energy being readily available and abundant 24/7, such as data centers, warehouses or pharmaceutical storage centers. It is important for teams exploring deals to be aware of issues relating to climate change and make climate resilience a priority when considering properties in vulnerable areas.

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