Purchasing any commercial property involves some level of risk. However, buying potentially contaminated property can be especially risky.
As a potential property owner, should you be concerned about buying property with environmental issues? Yes. But that does not mean that you should not buy the property at all. You must simply perform your due diligence before committing to the deal.
Below, we discuss some risks associated with buying property with environmental issues. We also outline what you should do before buying. These simple steps will protect you and everyone else involved in the deal.
Risks Associated with Buying Property with Environmental Issues
There are many risks linked to buying contaminated real estate. Some of the most notable risks include the following.
1. Civil Liability
There are many laws designed to hold landowners accountable for contaminating natural resources. One of the most significant is the Comprehensive Environmental Response, Compensation, and Liability Act (known as CERCLA).
Under CERCLA, landowners can be sued for causing contamination. They may be required to pay for cleanup efforts. This can be the case even if there was pre-existing contamination.
Landowners can also be sued for damages. For example, workers injured by contaminants can file a lawsuit. These suits may cost landowners thousands in legal fees and court-imposed penalties.
Buying previously developed land involves the biggest liability. Sites that have been used to store hazardous material are especially concerning. Undeveloped land is less likely to be contaminated. Still, buyers should perform due diligence to protect their investment.
2. Poor Return on Investment (ROI)
Buying property with environmental issues can reduce ROI. If a buyer did not know about contamination, they might overpay for a property. Even if they know, it is important that they understand the scope of contamination. This will let them accurately estimate cleanup costs.
Contaminated property reduces ROI in several ways. First, buyers may not be able to use the land as quickly as they expected. Cleanup efforts can delay projects by weeks or months.
Secondly, property with environmental issues might be less valuable than expected. This would reduce the buyer’s ROI if they intended to improve and flip the land. It will also make it difficult to resell the land if they need to abandon their investment.
3. Require Extensive Cleanup
Sites with environmental issues may require extensive cleanup. These cleanup efforts are often referred to as environmental remediation. Remediation can be very time-consuming and expensive. Cleaning up water contaminants is particularly costly.
Performing due diligence will help buyers understand the cost of cleanup efforts. They can factor these costs into their offer. This will prevent them from overpaying for land that will require major remediation.
What to Do Before Purchasing Property with Environmental Issues
As you can see, there are risks associated with buying property with environmental issues. Again, that does not mean that you should not purchase the property. It just means that you must evaluate your decision carefully.
Specifically, we suggest that you do the following before making a purchase.
1. Schedule an Environmental Site Assessment
An environmental site assessment or ESA will reveal any recognized environmental concerns (RECs). There are two types of ESAs. They are known as Phase 1 ESAs and Phase 2 ESAs.
– Phase 1 ESAs are performed first. A Phase 1 ESA involves an extensive review of property records. Inspectors will also assess the site. This on-site assessment should reveal any RECs. If the Phase 1 ESA team finds RECs, they will recommend a Phase 2 ESA.
– The Phase 2 ESA focuses on the concerns found in the first assessment. During the Phase 2 ESA, inspectors may collect soil and groundwater samples. These samples will determine the severity of the contamination.
The Phase 2 ESA will help the firm estimate cleanup costs. They can pass this information to the buyer. The buyer can use this data to make an informed decision.
2. Review Environmental Statutes in Your U.S. State
There are many federal environmental statutes. Then, each state also has its own set of environmental statutes. Some municipalities have created environmental laws as well.
To avoid violating these laws, buyers must familiarize themselves with all relevant statutes. This information will also help them understand how the ESA findings impact the land’s value.
These laws typically include minimal allowable amounts of certain hazardous substances. If soil samples reveal that the site exceeds these amounts, then remediation will be required.
3. Weigh ROI vs. Cleanup Costs
Buyers should account for estimated cleanup costs when calculating their projected ROI. Phase 2 ESAs will help them do exactly that.
If environmental issues will substantially reduce the ROI, then the property may not be a good buy. However, if the ROI is still strong after accounting for cleanup costs, they may want to move forward with the deal.
Balancing risk vs. reward is vital during any commercial transaction. But it is very important when environmental hazards are involved. If a buyer does not account for all variables, they could end up making a bad purchase.
4. Make a Purchasing Decision
The final step is to make a buying decision. The buyer can use the information in the ESAs at the negotiating table. They can attempt to bid low on the property if it has significant environmental issues.
If the seller will not budge on the purchase price, the buyer may need to continue shopping elsewhere. The findings of the ESA report will help the buyer know when to walk away and when to keep haggling over price.
Consider RSB Environmental for Commercial Real Estate Support
As you can see, it is possible to buy a property with environmental concerns. But you must do your due diligence. Otherwise, the consequences can be severe.
Buying property that you did not know was contaminated can ruin any expected ROI. This is because uncontaminated property is more valuable than sites with hazards.
To make matters worse, contaminated properties can expose you to civil liability. Site cleanup efforts can cost tens of thousands of dollars. This figure does not even account for any potential suits from injured staff or contractors.
Fortunately, you can mitigate these risks by scheduling a Phase 1 ESA. From there, you may need to book additional assessments like a Phase 2 ESA. These assessments will reveal the scope of any potential hazards.
Not sure where to begin? RSB Environmental can help. Our experienced firm offers a wide range of environmental services. We can perform Phase 1 and Phase 2 ESAs. We also offer remediation and consulting.
To learn more about how to get started, book a consultation with our team. One of our environmental experts will be happy to help!
