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6 Things You Need to Know About Environmental Due Diligence

By Ron Etter, Environmental Group Manager, Koontz-Bryant, P.C.

It never ceases to amaze me what we find when doing environmental due diligence on a property. Finding out that a site used to be a smelter for civil war artillery, or a former internment camp from World War II, or an old baseball field is exciting and fun. As much as I enjoy what I do, it’s important for you to know what you are getting into when starting a project. The following points are important to anyone who is beginning a project on a property.

1. A Phase I Environmental Site Assessment (“Phase 1”) is the normal starting point for environmental due diligence. Piecing all of the historical information together to determine how the property has been used and assessing the potential for contamination is the first step of the environmental due diligence process. Sometimes you can be looking at a historic topographic survey done by George Washington himself! In reconstructing prior uses you may learn about a potential contamination that may have been there in the past that may not be visible or known today.

2. Traditionally, Phase I Environmental Site Assessments (ESAs) were contracted by banks or lending institutions on properties where financing was being arranged. The Phase I ESA was primarily performed for the protection of the banks, who were concerned that if they loaned money for a contaminated property they may be held liable for the site cleanup. Over the last several years, many banks with loans under a million dollars and borrowers supplying a down payment have stopped requiring a Phase I, as banks and other lending institutions have come to understand their limits of liability for these loans. This leaves the property owner with the responsibility for environmental issues connected to the property. Today real estate investors, commercial brokers and agents are the most frequent requestors of Phase I ESAs.

3. “Buyer Beware” is more relevant now than ever before in commercial real estate transactions. Without a due diligence evaluation, unforseen environmental issues become the property owner’s burden, along with the costs of remediating any issues.

4. The Phase I report is only research; testing and surveys are outside of the typical Phase I requirements. A Phase I helps avoid surprises and allows for planning for future use of a property. A Phase I includes a walkover of the property and associated structures; a review of historic property information including maps, aerial photographs, deeds, telephone and address directories, etc.; a review of contaminated properties in the vicinity of the subject property; a summary of knowledgeable party information and review of prior reports; and the review of local, State and Federal files pertaining to the property address. However, a standard Phase I does not include: wetlands, radon, asbestos, lead-based paint, and drinking water. These “non-scope” issues can lead to costly and time consuming problems. In some cases they can prevent a buyer from developing the property the way they originally intended. A 20-acre parcel in a great location has all sorts of potential, but if half of it is wetlands, then there is a serious limitation to what can be done with it.

5. An asbestos inspection is required for commercial buildings prior to any renovations or demolition, no matter when it was constructed. Certain forms of asbestos building materials must be removed prior to the renovation and demolition of any commercial building. This can add significant costs to a buyer’s plan for a property. In addition to asbestos there are a number of other types of materials that must be properly removed and disposed of including refrigerant (CFCs) and PCBs that could be in light ballasts, old electrical transformers, old elevators, and loading dock ramp hydraulic reservoirs. Mercury in fluorescent light tubes, metal halide lighting, and the old mercury sprinklers found in fire suppression systems can require special handling and disposal. These contaminants add significant costs and aggravation to the development of a site.

6. Most environmental liabilities are manageable. There are several environmental regulatory programs in place that can facilitate the acquisition of contaminated property. Regulations can be utilized to manage environmental remediation cost-effectively and in a timely manner. For example, the Virginia Voluntary Remediation Program (VRP) allows owners, under certain conditions, to clean up a site and get certification from the DEQ that no further regulatory action will be taken.

Knowing about potential environmental liabilities will better prepare you to allocate the proper budget and schedule to your project. It is always best to start the environmental due diligence as early as practical. If you have any further questions or need help with environmental due diligence, please contact Ron Etter at 804-200-1920 or by email.