There are many reasons to perform Environmental Due Diligence. The most compelling reasons have to do with the risk of financial loss from possible contamination. In addition there’s a legal liability issue when buying contaminated land. Finally, there’s a health and human safety component wise commercial real estate buyers should always be concerned with.
Protect yourself from financial loss.
The bottom line when considering the need for Environmental Due Diligence is financial. All the reasons in favor ultimately point back to the expenses, known and unknown of purchasing contaminated land.
Commercial Lenders & Financial Institutions
Financiers have lending parameters that need to be met before they lend money. These are usually expressed in the form of a loan-to-value ratio. These ratios vary based on the risk tolerances of the commercial bank, but a good rule of thumb is 80:20. A Financer will lend 80% of the value of a commercial property. In order to lend 80% they need to know what 100% of the value of the property is. Standard practice is to get an appraisal to make sure the sales price matches the market value. What a loan officer doesn’t know though, is what an appraisal doesn’t capture. It doesn’t reflect the adverse impact on the value of property from hazardous substances in the soil and groundwater.
As with anything in life, commercial investors run the spectrum from amateurs to professionals. We frequently find amateurs, almost exclusively when they are all-cash-buyers, skip environmental due diligence in a real estate transaction. As with skipping paying for an insurance policy, often nothing bad happens. But often enough we get the phone calls when these new investors would like to buy their second property and need conventional financing from a lender.
The financial institutions won’t make a loan without a Phase I Environmental Site Assessment (ESA). It’s at this point, when an environmental professional takes a good hard look at the property, the investor realizes they overpaid for the property. Financers won’t lend without a clean Phase 1 ESA so the all-cash-buyer’s money is locked up until they fix the problem. This typically means more money spent doing a Phase II Environmental Site Assessment and possibly remediation of the recognized environmental conditions (RECs) that were found by the environmental consultant.
Guard Against Environmental Liability.
When purchasing commercial real estate, if a Phase 1 ESA isn’t performed and there’s no contract stating otherwise, the potential environmental liabilities that exist on a parcel of land are purchased along with the property.
Think about that for a second.
When you buy a commercial property without a Phase 1 ESA, you are buying the responsibility to clean the property to the standards of the federal and state regulatory bodies and the environmental laws passed by the government. As I mentioned before, environmental liability protections are really financial liability protections.
Protect Health & Human Safety.
In weighing costs and expenses of different levels of due diligence it’s easy to forget that ultimately we are trying to protect health and human safety. Sometimes the safety is that of the general public. Other times it’s your own safety.
Just this week we had a wise woman call us for an environmental database search on a vacant residential property she was trying to purchase for a vacation home. Typically, vacant residential land is low risk but this one was adjacent to a gas station. This woman knew she would need a water well on the property. She also knew her property was down gradient (down hill) from the gas station. Our environmental screen showed the gas station to have an open incident with the state for multiple leaking underground storage tanks over its long history. This woman found out before she bought the lot, that there may be an impact from gasoline to the water she herself would need to drink.
If you need a Environmental Due Diligence on your property or one you are interested in purchasing, give A3 Environmental Consultants a call. We’ll work to get your Environmental REC removed with the utmost in confidentiality, we’ll meet or exceed ASTM Standard E1527-13 on any sort of commercial or industrial property. Our reports meet the requirements of all lenders and government agencies such as the Small Business Administration (SBA), Housing and Urban Development (HUD) and the United States Department of Agriculture (USDA). A3 Environmental Consultants can be reached at (888) 405-1742 or by email at Info@A3E.com.