Whether you are looking to acquire a single piece of real estate or 300 pieces of real estate, keep in mind that you could be buying more than the physical improvements. You could be buying some environmental liability too. Here are five things to consider:
- Is there a possibility of an environmental issue on the property? This is a difficult call. I cannot count the number of times over my career that an issue has been identified and both the seller and prospective purchaser were completely unaware of the site history. All the more reason to perform proper due diligence.
- Property size or cost is often irrelevant. 50,000 square feet of flex space can have a $50,000 environmental problem and a 5,000-square-foot -stand alone building can have a $500,000 environmental problem.
- Direct cleanup costs are not the only things to consider – 3rd party liability and reputational risk are factors also.
- Is the property subject to State or local property transfer regulation? Such as the Connecticut Transfer Act (CTA) or New Jersey’s Industrial Site Recovery Act (ISRA).
- Are high-risk tenants present on the property? Onsite drycleaners, auto service, manufacturing all raise red flags.
Acquisition Environmental Assessments
Real estate investors can protect themselves from acquiring environmental liability along with their prime real estate by doing thorough due diligence, specifically an acquisition or equity level Phase I Environmental Site Assessment (as well as any state-specific property transfer requirements).
The Phase I ESA looks at the current and past uses of the property and surrounding area to evaluate whether the property is likely to be contaminated. Furthermore, the equity Phase I Environmental Site Assessment process comprises the “all appropriate inquiry” or “AAI” required for the purchaser to be protected from CERCLA / Superfund liability as an “innocent landowner.” For more on Phase Is, this blog provides a good overview: Phase I Environmental Site Assessments, a Comprehensive Overview.
Also keep in mind that while CERCLA liability protection is extremely important and is one of the primary purposes of the Phase I Environmental Site Assessment, many other laws can impose liability on a property owner such as the Resource Conservation and Recovery Act (RCRA), the Toxic Substance Control Act (TSCA), Clean Water Act (CWA) and numerous state and local laws. The standard AAI Phase I ESA isn’t necessarily designed to cover all of these item, so depending on the property use you may also want to consider other due diligence such as an environmental compliance audit (for example on industrial properties), or an erosion control inspection (if the site is under development).
If a potential environmental concern is identified then a Phase II Environmental Site Assessment may also be necessary which involves soil, soil gas or groundwater testing to confirm whether there is contamination. For more on options after the Phase I, include Phase II Assessments, check out my colleague Jenny Redlin’s blogs:
Life After the Phase I Environmental
The Phase I’s Ugly Stepsister – the Phase II
Environmentally Impacted Sites
Finding contamination during the due diligence doesn’t have to kill a deal. The purchaser has several options to assign liability or quantify the problem if an environmental issue is discovered. I’ll talk more about these options in an upcoming blog.