Environmental Due Diligence – It’s Not Just For Buyers
Phase I Environmental Site Assessments (ESAs) have become commonplace and they are the foundation of environmental due diligence efforts for prospective real estate buyers, but they can also be a valuable tool for the well-prepared seller on the other side of the deal.
Know your true value! Recognizing and understanding the environmental issues associated with a property can be central to establishing a property’s true value. Having a solid understanding of environmental issues allows a seller to respond knowledgeably to a buyer whose offer may be discounted to reflect an unrealistic worst-case scenario.
What don’t I know? Buyers are looking to back-stop an innocent landowner defense and lenders typically require borrowers to conduct Phase I ESAs as part of the lending institution’s environmental due diligence, but sellers may need to conduct environmental due diligence in order to make representations and warranties that may be required to get a deal done. If a seller doesn’t have a thorough knowledge of a property’s environmental condition, a Phase I ESA or Phase II subsurface site investigation may be required in order for a seller to make the requisite representations.
But what if we find something? By conducting its own environmental due diligence, an owner is at risk of discovering contamination and needing to pay for additional investigations and cleanup, and also possibly having to respond to associated regulatory issues. This is not a pleasant prospect, but a perceptive buyer will identify these very same issues when completing its own due diligence. It is better to know ahead of time than to be surprised by a prospective buyer. With the clock ticking prior to a final purchase agreement, the buyer will often adopt a worst-case scenario and assume that a potentially contaminated property could be saddled with burdensome regulatory requirements and need expensive and disruptive cleanup efforts to bring an environmental problem under control. Knowing ahead of time lets the seller control the cleanup and presents the opportunity to get regulatory approval of the cleanup, confirming that no further remediation (NFR) is required. A regulatory agency closure or NFR letter goes a long way to assuring a prospective buyer that their potential risk has been successfully managed.
Time is money! Particularly in “short fuse” situations where time is of the essence, a seller having performed its own environmental due diligence before marketing the property can smooth the way for a quick and seamless transaction. If contamination or compliance issues are identified ahead of time, they can be put to bed before they become a concern for a prospective buyer, or they can be made part of the deal. Additionally, being able to share thorough, well-documented environmental assessments with prospective buyers can speed their due diligence efforts as well.
What about reporting? Another consideration for owners is that they must be aware of the need to balance the potentially inconsistent concepts of confidentiality and regulatory reporting obligations that might result from information identified during the due diligence process. There are significant reporting requirements under various environmental laws that may be applicable to information that is gathered, or conditions that are discovered during environmental due diligence; typically, those obligations fall to the property owner but in some instances they can rest with the consultant who is completing the environmental assessment. Be clear on who is responsible for what!
Summing up: There are a few key items to keep in mind when performing your environmental due diligence:
• Success favors the well prepared! Things are more likely to “fall through the cracks” in a last minute rush. Start early!
• An old ESA might not provide the protection you desire. Remember the ASTM standard establishes a “shelf life” for ESAs. That old report might be full of valuable information but if it is more than 180 days old, it does not qualify as “all appropriate inquiry” and the ESA will need to be revisited.
• Remember you might need more. An ESA is not all-encompassing; a property might easily have environmental concerns that are beyond the scope of a Phase I ESA. Potentially significant issues like asbestos, lead-based paint, and mold all fall outside the realm of a standard ESA. One size does not fit all; invest in an environmental assessment that addresses all of your needs.
• Experience matters. Carlson’s environmental due diligence experience predates the establishment of the ASTM environmental site assessment standards. We are ready to develop and implement an environmental due diligence strategy that gets you where you need to go. Please contact us for additional information.