Environmental due diligence should be performed any time that commercial real estate changes hands. Taking this step protects all parties involved in a deal, including financial institutions and businesses.
To help protect you when you engage in commercial real estate transactions, we have created this guide on how environmental due diligence projects work. We also provide tips on how best to manage these projects.
What Are Environmental Due Diligence Projects?
Due diligence is the act of screening a site for potential environmental hazards. There are many different ways to perform this screening, which we will unpack later in this guide.
These projects check for the presence of materials that could endanger the health and safety of humans. Due diligence projects examine both air quality and soil quality. These projects also reveal the presence of environmental liabilities. This information allows investors to make informed buying decisions.
Why Are These Projects Needed?
Due diligence projects protect everyone involved in real estate transactions. They are especially beneficial to buyers. If a buyer does not put forth the effort to perform due diligence, they may be held liable for any potential environmental impacts.
These projects are also required by financial institutions. Lenders will not release funds for a commercial property if these projects have not been completed.
Types of Projects
There are many different types of environmental due diligence projects. Not all projects are required for all transactions. Some of the most common projects include the following.
Phase 1 Environmental Site Assessment
A Phase 1 environmental site assessment is the standard due diligence project. A Phase 1 ESA is performed as part of most commercial deals. Each Phase 1 ESA is a multi-stage project.
– The first part of an ESA is a records search. Inspectors will review title records and other site histories. They will determine whether the site has been used to store hazardous materials.
– The second part of a Phase 1 ESA is an on-site inspection. The team will look for environmental concerns. Examples include:
- Buried storage tanks
- Hazardous materials
- Steel drums
- Signs of contamination
After both parts of the Phase 1 ESA are complete, inspectors will generate a report. The report will detail their findings. Any concerns will be noted in the report. The report should be provided to the land buyer and the lender.
A Phase 1 ESA protects buyers from liability. Buyers can use these findings as a legal defense if environmental contaminants are discovered after the deal is complete.
Phase 2 Environmental Site Assessment
A phase 2 environmental site assessment is not always required. Phase 2 ESAs are needed when the Phase 1 assessment reveals the presence of potential contamination.
Phase 2 ESAs are highly focused assessments. Inspectors will only address concerns noted in the Phase 1 ESA report.
Your Phase 2 ESA inspectors may collect soil or water samples. They might gather air samples as well. After the samples are gathered, they are sent to a lab and tested. If contaminants are discovered, then remediation may be required.
Site remediation involves cleaning up environmental contamination. Remediation can improve soil, air, or water quality. Site remediation can be quite expensive. As a result, the findings of a Phase 2 ESA can reduce the value of a commercial property.
Transaction Screen Assessment
Transaction screen assessments (TSAs) are less thorough than Phase 1 ESAs. They involve a rapid records review and on-site inspections. TSAs can be more affordable than Phase 1 ESAs. However, they do not offer the same level of liability protection.
While Phase 1 ESAs are more costly, they are a worthy investment. Most reputable environmental firms do not even perform TSAs because TSAs expose clients to liability. Instead, firms such as RSB Environmental offer Phase 1 and Phase 2 ESAs.
Records searches with risk assessments (RSRA) also offer no liability protection. Like TSAs, they are generally not recommended.
RSRAs involve a simple search of historical records. Assessors also search available government databases. These RSRAs reveal what previous property owners may have used a site for. However, they have no on-site inspection component.
An RSRA might be an acceptable option when buying undeveloped land. However, Phase 1 ESAs are the far better choice. Undeveloped land could still be contaminated by adjacent properties.
How to Manage a Due Diligence Project
Managing a due diligence project can be quite challenging. However, these tips can help make the process simpler.
When managing environmental due diligence projects, we suggest that you perform the following actions.
Conduct your research when searching for commercial properties to buy. It’s essential when buying developed sites. Find out what types of businesses have been on the property.
Certain types of buildings warrant more concern than others. A few examples include:
- Gas stations
- Dry cleaners
- Manufacturing plants
- Chemical processing plants
Sites used for the applications above are more likely to require remediation. You may decide that buying such a site is not a worthwhile investment. Even if you choose to move forward with the deal, you might need to alter your initial offer.
Doing your research can help you estimate how much due diligence you will need to perform before buying the land. However, it is no substitute for a professional assessment.
When you’re planning a project, ask plenty of questions. These questions should be directed at both the seller and your lender. Ask the seller for all property records. Find out what they used the site for and for how long. If they are not forthcoming, then you should be concerned.
Find out what sort of due diligence your lender requires. Most lenders require a Phase 1 ESA at a minimum. Some lenders will accept a TSA or RSRA for a low-risk property. Remember that these lesser assessments provide you with no liability protection.
Outsource the Task
The best way to manage a due diligence project is to outsource. An experienced environmental services firm can oversee your entire project.
Outsourcing will ensure that the project is completed in accordance with EPA regulations. It will also give you peace of mind. You can rest assured that you are protected from liability as it pertains to federal environmental regulations.
When looking for a support firm, we recommend that you look for one that offers a full suite of services. Some firms offer only TSAs, RSRAs, and Phase 1 ESAs. Hopefully, you will only need a Phase 1 ESA.
But what if the Phase 1 ESA reveals concerns? If that occurs, you will need to find another firm that offers Phase 2 ESAs and remediation.
By selecting a true full-service firm the first time, you can obtain all services from a single source. This approach will make life much easier should your property need remediation.
Want to Learn More?
RSB Environmental is an experienced environmental consulting firm with teams located across the U.S. We strive to educate those involved in commercial real estate by providing informational resources. Our goal is to help businesses protect their investments by understanding the important elements of environmental due diligence projects.
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