The thought of buying a commercial property can be exciting. But, any large-scale purchase also carries some amount of risk.
Like savvy business owners, you and your team have likely crunched all of the numbers to confirm the viability of your venture. Here’s one more thing to think about: you need to pay close attention to certain environmental risk factors.
Whether this is your first time buying commercial property or you have breezed through many transactions in the past, we have created this guide to help protect your investment. Let’s review environmental concerns before closing your deal so that you’re set up for success.
Evaluating Risks for Certain Types of Commercial Real Estate
No matter the type of commercial property you are seeking to acquire, there are environmental risks if not handled properly. That’s why it’s so important to perform due diligence. If you don’t, then your acquisition may not be the money-making venture that you intended.
Consider the environmental risks associated with the purchase of these five types of commercial real estate properties.
1. Properties for Hospitality
Any commercial real estate that you will use to provide people with lodging, entertainment, or prepared food falls into this class. Before serving guests on your hospitality property, you must make sure that it is safe. This means you should inspect the structures and assess the soil and water. Failing to do so can create a PR nightmare and sink your new business.
2. Industrial Properties
Industrial-use commercial properties cover a wide range of uses. Examples include sites for making or producing goods. They also include warehouses and office spaces. These sites need more environmental considerations than other types of land.
With these sites, you must be careful not to affect nearby properties. You should also be very aware of nearby waterways and of people who live close by.
3. Retail Properties
Retail commercial properties include land used to provide services or goods to consumers. The land is usually found in developed areas that could have been used for a different purpose in prior periods. That’s why it’s important to perform an Environmental Site Assessment (ESA) beforehand to ensure that the property is not an environmental risk.
4. Office Spaces
Office spaces are a special type of industrial-use commercial property. Like general industrial property, they rarely serve customers on-site. However, you still need to make sure that the environment is safe for employees.
5. Multi-Family Housing
Multi-family properties are sites that have more than one living unit. These include apartments, assisted living facilities, or duplexes. Whether you’re planning to build on undeveloped land or looking to repurpose a previous building, you should consider assessing the quality of the land and property to ensure there are no environmental hazards.
The Connection Between Environmental Factors and Buying Commercial Property
Why go through this effort to review environmental hazards and perform a property condition assessment at the location where you are looking to purchase?
Both state and federal government agencies have enacted tough environmental laws. These laws require commercial property owners to perform due diligence before making a purchase. Their purpose is to check for potential environmental hazards.
The most notable law is called CERCLA. It refers to the 1980 Comprehensive Environmental Response, Compensation, and Liability Act. In short, CERCLA allows for private parties to sue past or current property owners, and the Environmental Protection Agency (EPA) can also sue commercial property owners. These suits are often aimed at paying for the cost of cleanup efforts.
One provision of CERCLA says that property owners must fix any contamination on their land. This provision applies even if they did not cause the contamination themselves.
That’s why failing to perform due diligence could cause you to be left with major legal issues for not addressing environmental issues. This could cost you tens of thousands of dollars in lost income and fines.
What Environmental Factors Should I Think About Before Buying Commercial Property?
Buying a commercial property is risky if you fail to do your due diligence. But, you can mitigate risk by reviewing some key environmental factors. Before you buy a commercial property, answer these questions:
- Has the land been developed?
- Has it been used for any commercial application in the past?
If not, then there is a good chance that it is free from environmental hazards. However, you should never assume this. Doing so can be incredibly costly.
Even if you believe that the land has never been developed, you should still schedule a Phase 1 Environmental Site Assessment. A Phase 1 ESA will provide detailed insights into a property’s history. It will also help you make an informed investment decision.
If Used, What Was It Used for?
If the land has been developed, you need to know what people used it for. For example, former manufacturing facilities carry a large amount of risk. In contrast, office spaces carry very little risk. Either way, we still recommend conducting a Phase 1 ESA to gauge the environmental condition of the property.
Do Industrial Properties Border the Land?
If a property is near industrial sites, then the soil or groundwater may be contaminated. You should be aware of the presence of hazardous waste storage facilities. Sites that have underground storage tanks are also concerning. Manufacturing plants that use dangerous chemicals are another potential issue.
Will the Land Require Remediation?
Land with hazardous substances in the soil or groundwater is not safe. These sites will need environmental remediation. Environmental remediation is a process designed to remove contaminants. It can clean up soil, groundwater, and sediment.
Remediation efforts may be very costly. The costs depend on how severe the contamination is. You should account for this when you bid on the land.
Does the Lender Require a Phase 1 ESA?
Most lenders require Phase 1 ESAs before they fund commercial real estate transactions. Some lenders do not. But, we still recommend that you complete a Phase 1 ESA before buying commercial property.
During a Phase 1 ESA, inspectors will review the property’s history. This research will reveal if the site was ever used for concerning activities. The ESA team will also conduct an on-site inspection, which will reveal if hazards are present.
If there are serious issues on the property, then you may need to schedule a Phase 2 Environmental Site Assessment. A Phase 2 ESA will reveal the scope of the contamination. It will also help find out what remediation efforts are needed.
Learn More About Commercial Property Environmental Concerns
Are you an investor or business owner? If so, you must stay apprised of the latest developments in the environmental compliance sector.
It is important to account for any and all environmental concerns when buying a commercial property. Not doing so can prove disastrous. That is why you need a trusted source to help you understand this complex topic.
RSB Environmental is the premier environmental assessment team in our region. We regularly release an email newsletter with the latest information about environmental considerations, especially when buying commercial property.
Send an email to firstname.lastname@example.org to be added to our email list. We look forward to helping you stay in the know for your commercial real estate transactions!