Environmental due diligence involves a legal and technical investigation conducted to satisfy certain liability protections for landowners, tenants, and prospective purchasers of real estate property using state and federal environmental laws or standards. These investigations identify the history, presence, or potential risks of environmental contamination.
The environmental due diligence inspection standards are set by the Environmental Protection Agency (EPA). Environmental Professionals (EPs), those who possess sufficient specific education, training, and experience necessary to adequately conduct environmental due diligence investigations, work with the User to determine an appropriate extent of evaluation of the property according to their goals and level of risk tolerance.
If you plan to purchase or lease a property, performing a thorough environmental due diligence assessment is a wise way to protect yourself from avoidable risk and is often a step required by finance and lending institutions. Doing so can avoid potential impacts on your health and finances, the health of your employees and the community, and the environment.
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What Is Environmental Due Diligence?
The first step in full environmental due diligence (meaning satisfying state and federal standards on environmental liabilities and risks) is understanding the All Appropriate Inquiries (AAI) Rule.
The AAI Rule sets forth the process to be followed when environmental due diligence occurs. It provides guidelines and recommendations for the process and specific standards for the education and experience level of the professionals who perform it.
Principles that must be followed can be found in the American Society for Testing and Materials (ASTM) guidelines.
Phase I Environmental Site Assessment (ESA)
A Phase I Environmental Site Assessment is the standard used to evaluate environmental contamination associated with real estate property. Conducting an ESA before purchasing real estate is important, as it can help the owner avoid liability for environmental contamination on the property and impacts to surrounding properties.
The ESA can help the landowner qualify as an innocent landowner, bona fide prospective purchaser, or contiguous landowner according to Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) regulations.
Transaction Screen Assessment (TSA)
A Transaction Screen Assessment (TSA) follows a limited version of the ASTM guidelines, but it does not satisfy the requirement to conduct all appropriate inquiries and does not qualify the User for liability protections under CERCLA regulations. It is much quicker and cheaper to perform than a Phase I ESA for Users needing to simply identify any potential environmental concerns. Potential environmental concerns include the possible presence of any hazardous substances or petroleum products under conditions that may indicate an existing release, past release, or the threat of a future release.
Records Search with Risk Assessments (RSRA)
An RSRA is the minimum requirement for commercial properties designated as low-risk that may not require a full ESA. This procedure involves checking state, federal, and tribal databases and historical records to classify the property as high- or low-risk for environmental contamination.
An RSRA will not qualify the User for liability protections under CERCLA regulations, and it does not meet the ASTM environmental due diligence standards.
When Is Environmental Due Diligence Required?
Commercial lenders typically require environmental due diligence reports before financing a real estate purchase, refinancing an existing loan, or accepting collateral for a construction loan. Environmental due diligence is usually required if a property is held as collateral.
In addition, public agencies usually require environmental due diligence before they release grant funding for projects related to real estate developments or land improvements.
Environmental Due Diligence Processes: What to Expect
During a Phase I ESA, an EP will review historical records such as aerial photographs, city directories, regulatory records, and fire insurance maps, as well as environmental radius reports and physical settings reports, and will conduct an in-person site investigation to determine the presence of Recognized Environmental Conditions (RECs). RECs are defined as the presence or likely presence of hazardous substances or petroleum products in, on, or at the subject property due to a release to the environment.
How Much Does Environmental Due Diligence Cost?
A complete Phase I ESA by an AOTC Environmental Professional for a property within the same county as one of our offices and under 20 acres in size typically costs between $1,800 and $2,400.
Other factors may play a part in the performance of environmental due diligence, which can affect cost. These factors can include:
- Size and location of the property
- Travel costs for your consultant
- The number of parcels included in the “Subject Property”
- Additional non-scope items such as wetlands, species, mold, asbestos, lead, etc
- Physical features of the property
- The risk tolerance of the User
Before deciding on the right servicer for your environmental due diligence needs, ensure that you are choosing a company staffed with well-qualified and experienced environmental professionals.
Hiring an Environmental Consultant
When hiring an environmental consultant, there are several factors to keep in mind. You’ll want to ensure that your professional is qualified and knowledgeable. Before deciding on one, questions to ask a consultant can be grouped into several types.
Make sure you and your consultant are compatible by asking about the following:
- Is the consultant familiar with the standards of your state and county?
- Does the consultant have experience with the type of contaminants that potentially exist in your industry and area?
- Is the consultant able to clearly communicate with you?
Some environmental regulations may vary from location to location. Look for a professional who is compatible with your needs, and make sure that you can work well with one another.
Credibility is another area that must be considered when hiring an environmental consultant. Consider the following questions:
- What kind of reputation does the consultant have?
- Does the consultant have solid references?
- Is the consultant experienced with federal, state, and local regulatory agencies?
- Does the consultant belong to any professional associations?
- What training, certifications, licenses, or registration does the consultant have?
- What is the consultant’s educational background?
Credibility questions typically consider the technician’s expertise, knowledge, and reputation.
Finally, cost-effectiveness is an important consideration as well. You need someone who knows what they’re doing, but you shouldn’t overpay for their services.
- Are the consultant’s fees in your price range?
- Do you understand what you are paying for?
- Has the consultant provided a detailed scope of work?
Clear expectations about cost can help you rest assured that environmental due diligence is performed at a rate fair to both you and the contractor.
Understanding the Risks of Environmental Contaminants
If you purchase a property without having performed environmental due diligence and it is later found to be the source or a conduit of environmental contamination, you may be subject to significant fines simply for owning the property. These fines can include the cost of cleaning up the site, compliance obligations, and third-party legal obligations.
If the environmental impact is large enough, costs can run into the millions, which can easily wipe out the value that you expect to obtain from your real estate investment.
Who Should You Call?
If you’re considering purchasing property and need assistance with your environmental due diligence, contact Alpha-Omega Training and Compliance (AOTC). Our experienced and qualified staff of Environmental Professionals can help you avoid costly fines and remain compliant with federal and state environmental regulations.
Our services are designed to ensure organizations across the Southeast are protected and safe. We take a comprehensive approach to ensure our services and solutions are customized to fit your specific needs.