Guest Post: The Importance of Conducting Environmental Due Diligence in Real Property Transactions

Written by Lisa K. Phillips, CGWP, CP, Phillips Environmental Consulting Services, Inc..

A property is for sale, the location is perfect for your intended use, and, best of all, the price is right. A steal, in fact, given its prime location. Its located in a burgeoning city flocked by tourists, Niagara Falls, New York. The region of the city even has an inviting name — Love Canal. But wait, we know enough about Love Canal to be skeptical. After all, its history is infamous. We want to know more.

This example is obvious, and may seem extreme, but there is reason why we want to know the environmental condition of a property for which we are acquiring an interest. The magnitude of any identified concern will not likely be of the same scope as Love Canal, but for most commercial interests, any liability that arises in the future can be enough to jeopardize the business prospects.

Generally, environmental due diligence is completed by prospective new owners and operators of commercial real estate for two reasons. First, is to identify potential environmental liabilities associated with a property. Second is to satisfy the requirements to qualify for statutory limitations on liability for cleanup of contaminated sites. These are known as landowner liability protections.
This is important as cleanups can easily cost more than the value of the property.

To be eligible for landowner liability protections with regard to a property, the prospective owner or operator must have conducted “all appropriate inquiry” into its previous ownership and uses. “All appropriate inquiry” is described in the standardized process known as a Phase I Environmental Site Assessment (ASTM Standard Practice E 1527 for Environmental Site Assessments, the most recent revision is ASTM E – 1527-13). The objective of a Phase I Environmental Site Assessment (Phase I ESA) is to identify, to the extent feasible pursuant to the standard practice, the presence or likely presence of any hazardous substances or petroleum products on the Property under conditions which indicate an existing release, a past release, or a material threat of a release. This is completed through interviews, review of historical record sources and environmental databases, and a site reconnaissance. The Phase I ESA must be conducted by an environmental professional having the qualifications outlined in the standard practice.

Importantly, the Phase I ESA must be completed PRIOR to purchase or occupancy of the Property by the prospective owner or occupant. Completion of a Phase I ESA can be expected to take about one month; however, sufficient time should be allowed to collect samples or obtain additional data that might be necessary based on the results of the Phase I ESA. Additional investigation may be necessary to evaluate the existing environmental condition of the Property and/or the extent of potential liabilities arising from the condition with regard to its proposed use. This additional investigation may take the form of a Phase II Environmental Assessment.

If contamination is discovered during the Phase I ESA process, a new owner must take additional steps to qualify for the landowner liability protections. This requires additional reporting to the state environmental agency, submittal of required notices, and the undertaking of all appropriate care with respect the hazardous substances or petroleum products discovered.

Despite the landowner liability protections, other environmental liabilities may be present that deserve evaluation prior to obtaining on interest in the property. These may be related to environmental liens placed by regulatory agencies to reimburse costs expended to respond to environmental conditions at the property, the risk of tort liability, and response costs necessary to satisfy the appropriate care requirements (to use or operate at the property safely).

Satisfying appropriate care requirements may include actions to: stop any continuing releases; to prevent future releases; to protect against unacceptable exposures; to not exacerbate contamination; to comply with any land use or resource use restrictions; and/or to allow responsible parties to undertake, operate and maintain response (clean-up) actions.

One example of a potential liability to be evaluated or mitigated prior to a commercial property transaction is related to the emerging issue of vapor intrusion. Intrusion of vapors into a building, even if from an offsite source, may affect property values and/or may warrant mitigation measures to protect against unacceptable exposures. Mitigation of other types of exposure hazards may include the placement of caps over impacted areas, or the provision of an alternate water supply. Extensive sampling may be required to allow proper handling of soils and groundwater during construction activities and/or to identify measures to be undertaken to protect against unacceptable exposures. During construction, special designs may be necessary to prevent exacerbation of contamination, such as a specially designed storm water system. Hazardous substance containers or underground storage tanks may need to be removed to stop a continuing release or prevent the potential for a future release. Notices and health and safety plans may be required to ensure that third-parties that might come into contact with the contamination on the property do so safely.

Review of the information learned during the due diligence process with a qualified environmental professional and legal counsel helps to ensure that a prospective purchaser is aware of the necessary measures to be undertaken, potential liabilities and associated costs. In addition, many environmental professionals can assist with acquiring funding assistance to undertake eligible environmental activities at a property through typical brownfield tools that may include loans, grants, and tax incremental financing.

Conducting all appropriate inquiry and any additional environmental due diligence deemed necessary prior to purchase or occupancy of the Property can protect against liability for clean-up of contamination that might be discovered. In addition, the information can be used to assess other potential environmental liabilities, such as those associated with the undertaking of appropriate care based its intended use. Because the cost of conducting a Phase I Environmental Site Assessment is usually marginal compared to the potential costs of a clean-up, the potential benefits usually outweigh the costs.

Plazacorp appreciates the time Ms. Phillips took to write this article. The article was requested to provide a generic overview of the type of situations one may experience when purchasing or owning commercial property. As each property is unique, she encourages purchasers to engage environmental and legal professionals appropriate to protect the purchaser’s interests.