Environmental Due Diligence Begins During Site Selection
Engaging a consultant and conducting an environmental site assessment on properties under consideration can save time and money later.
In a turbulent commercial real estate market, with enforcement of ever-tougher environmental regulations a constant priority, it is more important than ever to conduct environmental due diligence that is thorough, timely, and meets the needs of the real estate transaction.
Because the required cost and time of environmental due diligence increases if successive phases of environmental investigation are needed, there is a benefit to involving one’s environmental consultant in the site selection process for relocation or expansion. At a minimum, it is recommended that an ASTM Phase I environmental site assessment (ESA) be conducted on a short list of properties being considered for relocation or expansion.
Environmental due diligence can reduce the severity of future liabilities and can affect the outcome of an imminent real estate transaction. The timeline of the transaction, the expertise it demands, and the intended use, scope, and legal ramifications of the transaction’s due diligence must be considered.
Here is an overview of the steps that should be taken and important questions which should be posed to a potential consultant to ensure that proper environmental due diligence is completed:
Environmental due diligence is generally conducted for the purpose of assessing a property involved in a real estate transaction for the presence of contamination (of soil, ground water, indoor air, etc.). Contamination of these media may represent significant financial and legal liability to the parties involved in the real estate for several reasons. Liability can result from enforcement actions by the federal Environmental Protection Agency or state regulators; the impact of contamination on the marketability and, therefore, the value, of the subject property; litigation from off-site properties impacted by a release from the subject property; or litigation by persons who claim to have suffered adverse health affects from contamination at the subject property.
Industry professionals have created standards and practices for conducting ESAs to evaluate real estate for such potential liability. Congress codified the standards for conducting environment due diligence in 2005 with the enactment of the Standards and Practices for All Appropriate Inquiries, Final Rule (AAI). In turn, ASTM E 1527, Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process also was updated in 2005, satisfying the requirements of the AAI rule. To date, ASTM E 1527 remains the most widely used industry standard for conducting the initial phase of environmental due diligence.
QUALIFY YOUR CONSULTANTS
Proper environmental due diligence begins by selecting a qualified environmental consultant. A Statement of Qualifications (SOQ) package should be requested from the consultant. The SOQ should contain information pertaining to the experience and background of the consultant, including what types of services they provide, where they have worked, for whom they have worked, and on what types of properties they have worked.
All consulting firms should employ staff that meets the definition of an “Environmental Professional,” as defined by ASTM E 1527-05. This definition is based on education, experience and/or certifications, and constitutes an individual who meets the industry qualifications to manage the Phase I ESA. It also is beneficial to work with a consultant who has experience conducting assessments in the general locale and on the property type involved in the real estate transaction. Further, the consultant/firm should have applicable regulatory licensure to conduct business in the state and for the type of assessment being completed for the transaction. For example, if asbestos sampling is being conducted, the consultant should be a licensed asbestos inspector.
At times, the intent of real estate due diligence is to satisfy the requirements of a lender. If so, it is important to consider a consultant who has experience with the lender involved in the transaction and is on that lender’s approved vendor list. Retaining a consultant that has not been approved by the lender may result in delays and complications in the environmental due diligence process.
If a due diligence assessment, beyond what is encompassed by a basic ASTM Phase I ESA, is desired or may be useful at a later time, a consulting firm with experience in indoor-air vapor intrusion, wetlands delineation, and environmental permitting should be selected. Most firms performing ASTM standard assessments do not have this experience. To avoid confusion in what is expected, the contract for the work should specifically identify the desired scope.
DEFINE THE SCOPE
As indicated above, environmental due diligence typically begins with a Phase I ESA conducted to at least the industry standard, ASTM E 1527-05. However, other factors should be considered beyond this industry minimum depending upon your company’s needs.
For example, many lenders have due diligence requirements that exceed ASTM E 1527-05, such as conducting a screening for the presence of wetland areas. Or, depending upon the age of the building, a pre-renovation asbestos survey to identify and quantify the extent of asbestos-containing materials may be warranted. It is critical to discuss the scope of environmental due diligence services with your environmental consultant from the earliest stages of the transaction process. This consultation is key to formulating an environmental due diligence package that suits the needs of your company.
Environmental concerns are rarely “black or white” or “cut and dried.” In most cases, there is more than one way to view a concern identified during the course of environmental due diligence. With that said, it is important to be sure of the reason and the intended use of the environmental due diligence that is being conducted.
For example, if the objective of the due diligence is to obtain a loan, the directive to the consultant may be to simply satisfy the requirements of the lending institution. However, if the goal is to use the results of the environmental due diligence for contract negotiations with the seller, the consultant might be instructed to take a conservative (less risk tolerant) approach to issues. Environmental costs such as those to remove an underground storage tank and any associated contamination may be deducted from the purchase price or be a condition of sale.
LEGAL IMPLICATIONS, TIMING
Environmental concerns often have legal implications, such as when laws are violated or regulatory contamination limits are exceeded. Also, there may be regulatory requirements regarding how such violations must be addressed. This, in turn, may pose significant civil and criminal liability, as well as financial liability.
It is important to understand how and why a law has been violated, or a regulatory limit exceeded, whom the responsible party is, and what is necessary to correct the violations. An environmental consultant can provide insight, but legal counsel experienced in environmental matters should be retained to provide the ultimate direction and guidance regarding such matters.
Because due diligence efforts can produce sensitive information that often should be kept confidential, the consultant should be notified which parties, both internally and externally, with whom information can be shared. Legal counsel may advise that due diligence efforts be conducted through their office, as this may offer protection from discovery as an attorney work product.
Effective environmental due diligence can take the form of a basic Phase I ESA with a completion time of a few weeks. However, depending on the property, the purpose, and the user’s risk tolerances, it can also include Phase II environmental sampling and analyses, remedial cost estimation, and an environmental compliance audit—steps that take months to complete. It is important to be familiar with the timelines and generalized costs of the various levels of environmental due diligence.
Here is an environmental due diligence checklist:
- Request an SOQ to identify a consultant with the experience, certifications and expertise to conduct the due diligence.
- Discuss with your consultant the intended use of the due diligence and the plans for the property; choose a scope of diligence that addresses all environmental concerns/liabilities.
- Confer with an environmental attorney regarding the legal implications of environmental concerns identified during due diligence assessments.
- Retain an environmental consultant early in the real estate transaction process.