Understanding risk: property acquisition and environmental due diligence

It’s a fair assumption that you don’t come across the terms “Hazardous Materials Assessment” or “vapor intrusion” every day, but if you are purchasing commercial real estate property, these phrases are important during the assessment or due diligence process.

While you may have a great list of questions to ask when it comes to the location you’re considering, there are also critical current and historical environmental factors to review pertinent to the land or building you are considering. We’ve broken down the initial process associated with due diligence when assessing a property’s environmental condition as a general guide:

Phase 1: Environmental Site Assessments (ESA)

The Phase I Environmental Site Assessment is an in-depth assessment and report on the state of the property to determine the potential for environmental risks. Typically, this phase will include the following:

  • Site visit to determine the property’s condition and to understand uses, both current and past.

  • Database review (federal, state and local) to determine any storage or release of hazardous substances and disposal of hazardous wastes.

  • Review of all historical records as well as state and local agency records.

  • Interviews with current and past property owners and occupants.

These reports are completed to comply with the American Society for Testing and Materials Phase I Environmental Site Assessment (ESA) standard.

Most lenders require that a Phase I be completed if they are providing a loan for a building or land purchase. And it’s smart for you to know what you might be purchasing.

The results of your Phase I may indicate that you need additional site review in the form of a Phase 2.

Phase 2: Additional site review required

In some cases, depending upon the Phase I results, a second round of assessments may need to be conducted. This may include testing of soil, groundwater, vapor and materials for any environmental hazards or hazardous material.

Making the news of late is the attention to the topic of vapor intrusion.

Vapor intrusion occurs when chemicals created by contaminated soil or groundwater become vapor and infiltrate a building’s interior, causing potential health threats to current and future occupants. If vapor is found in the building, there are two courses of action that can be taken: passive vapor mitigation or active mitigation. The passive method involves installing barriers in existing buildings (or during construction) to prevent the entry of chemical vapors. In contrast, active mitigation involves changing the pressure between the building’s interior to block vapors. The cost of this method is higher than passive (thanks to expensive maintenance) but is generally more effective.

Bay West, a locally-based environmental engineering firm provides this case study on its website. 

Phase 3: Remediation

After all the studies and testing is done there is the possibility that any existing environmental contamination may need to be remediated. The solution is highly dependent on the type of clean-up that needs to be done. Know that you will work closely with local, state or federal agencies that govern the environment such as the Minnesota Pollution Control Agency or MPCA.

You may decide to purchase or not depending on the outcome of your environmental assessment. Prior land or building holders may be responsible for the contamination and you may be able to seek their agreement to remediate the contamination. Know that if you do buy and you decide to remediate there may be public incentives in the form of grants or loans to assist you with the cost burden.

Go the extra mile

Even after the environmental site assessments have been conducted and you’ve been cleared to purchase the building, there are ways you can continue make a positive impact on the property’s environment. This is especially true if you’re planning any demolition or new construction. Consider ways to par down construction waste or even recycle or reuse old materials from the project rather than tossing straight to the dumpster. Other ways you can do good to the environment include:

  • Waste management program design

  • Participating in waste minimization

  • Choosing electronic recycling

  • Waste consolidation, packaging, disposition

Provide yourself with the necessary knowledge in areas of environmental due diligence by hiring experts who do understand such terms. In addition, be sure you know and clearly understand your lender requirements as they may play a factor in what will and will not pass inspection in order for financing to be approved. Have questions about what to look for or how to get started with the assessment of your potential new property? Contact us for guidance; we’re here to help!