Why Include an Environmental Assessment in the Due Diligence Process?
by Holly Neber, REA Ė President, AEI Consultants
AEI Consultants is an environmental and engineering due-diligence and consulting firm with office locations nationwide.  Holly has worked in environmental consulting since 1996. 

Opportunity and risk abound in todayís distressed-asset marketplace.  As these assets become available, property investors often make decisions quickly and with limited due diligence.  Although many investors are gaining confidence in the valuation of these assets, they also should consider the potential risks that could affect the exit value, the cost to maintain or the cost to manage.

Environmental issues are an important concern for sellers, buyers and lenders because they may:

  1. affect the value of a property,
  2. lead to expensive investigation or clean-up costs,
  3. affect the marketability of a property to prospective purchasers and tenants, and/or
  4. lead to additional liability for all parties involved in the transaction. 

Since environmental liability is not limited to the parties which caused the contamination, even a new property owner who was not involved with the operations that caused the contamination are held responsible by regulatory agencies. Conducting proper due diligence in the form of a Phase I Environmental Site Assessment (ESA) provides some protection under federal law by documenting that the buyer performed due diligence and is therefore an ďinnocent landowner.Ē 

What is a Phase 1?  Phase 1 ESAs typically include a review of the historical use of a property dating back to 1940 or first developed use, whichever is earlier; an evaluation of the current on-site operations for potential environmental concerns; and a review of regulatory listings for the subject property and nearby sites to identify on-site or nearby reported releases of petroleum products or hazardous substances. Phase I ESAs are designed to help identify whether contamination is potentially present beneath a site so you can make an informed decision. 

What are some common concerns?  Red flag issues identified during a Phase1 ESAs may include a former dry cleaning operation at a retail center or a corner lot now occupied by a restaurant that was formerly a gas station. Other common sites of concern include auto repair facilities, especially those with oil/water separators or clarifiers. Current owners may not be aware of the historical use prior to their ownership. Environmental concerns can date back prior to the memory of people currently affiliated with the property so the assessment includes review of historical phone book listings, aerial photographs, building permit records, and other methods for identifying prior use. 

While not always included in a Phase 1 ESA, consultants will also, upon request, review the property in question for such Business Environmental Risks (BERs) as asbestos-containing materials, lead-based paint, mold and moisture intrusion, and compliance with regulatory requirements. These issues affect tenant relationships and marketability of a property, and can be costly to address. 

Time-Saving Tips:  A Phase 1 ESA can take two to three weeks to complete. To allow the environmental due diligence process to go smoothly, some tips are as follows:

  1. start the environmental assessment as early as possible during your due diligence period,
  2. use a consultant that is approved by the lender that will be involved in the deal,
  3. provide all prior environmental due diligence documentation to the consultant upfront,
  4. talk to your consultant about your goals, risk tolerance and any concerns you may have upfront.  

Bottom Line:  Environmental assessments are designed to help identify whether contamination at a site is likely so you can make an informed decision. Environmental issues donít have to kill a deal, and creative structuring of a deal can often provide work-around options for these issues. All parties are best protected from future expense by evaluating these issues upfront during the due diligence period. Savvy sellers may also conduct these assessments prior to marketing a property so they are fully informed of any potential challenges. A trusted environmental consultant will provide advice on common red flag issues with certain property types or creative solutions to complex environmental challenges. Environmental legal counsel is also indispensible in identifying and mitigating environmental risk.

Holly Neber, REA Ė President, AEI Consultants
[email protected]
2500 Camino Diablo, Walnut Creek, CA 94597
(925) 746-6000 x 117
View Scott Valley Bank - The Vault - August 2011