This post originally appeared on tBL member SCGWest’s blog and is republished with permission. Find out how to syndicate your content with theBrokerList.
Buying a commercial property requires plenty of research and due diligence on your part. You need to know everything about your property before you invest thousands or millions of dollars into it.
Part of this due diligence is the Environmental Site Assessment. If you are borrowing money to make the purchase, your lender will most likely require one of these. Even if you are paying cash, you should absolutely conduct one anyway to protect yourself from taking the responsibility for someone else’s mess.
What is an Environmental Site Assessment and what does it protect you from? Let’s find out.
What Is An Environmental Site Assessment?
Commercial properties, no matter what they are used for, affect the environment around them. Their very presence changes the landscape and has an impact on the area’s ecosystem.
However, some properties actively cause damage to the area around them. For example, they may have accidentally (or purposefully) released contaminated waste or materials into the environment.
If you buy a property where some kind of environmental contamination has occurred, you could be held liable. The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) states that owners, lenders, and lessors can be held responsible for environmental cleanup even if they didn’t cause the damage.
However, this same law also contains a “safe harbor” provision. This releases innocent landowners of responsibility as long as they did their due diligence before purchasing the property.
An Environmental Site Assessment is the due diligence you’ll need to show that you conducted if you’re ever in this situation. That is why completing the assessment before buying any commercial property is absolutely critical.
Unless, of course, you like the idea of spending hundreds of thousands of dollars cleaning up someone else’s environmental disaster.
Phase 1
The Environmental Site Assessment is conducted in two phases. Phase 1 is the paperwork and visual inspection. In other words, investigators will look at usage, records, and other information to determine the likelihood that environmental contamination could have occurred at the site.
In general, an ESA Phase I will generally include:
- A thorough review of past operating records, looking for any activity that could have resulted in environmental contamination
- Interviews with key government officials, past property owners, operators, and occupants
- A visual inspection of the property as well as comparing the current property to the site plans
- A visual inspection of any adjoining properties
The scope of ESA Phase 1 is not complete enough to determine if there is actual contamination present. However, you can get a good idea of whether or not contamination is likely to have occurred.
To get definitive proof of contamination, you have to move to ESA Phase 2.
Phase 2
Most of the time, ESA Phase 1 is sufficient due diligence — as long as the report shows that that the likelihood of contamination having occurred is very low.
If the report shows possible contamination, then a Phase 2 assessment is usually needed.
Phase 2 is an actual physical inspection of the building and grounds looking for signs of contamination. The assessment usually involves:
- Taking soil and water sample from the property to test for contamination
- Comparing those results with the local, state, and federal regulations
- Inspecting the building interiors for the presence of mold, radon, lead paint, or other materials
- Identifying wetlands, endangered species, or ecological resources in the area that would be negatively impacted by the property’s use
After a Phase 2 assessment, there is now definitive proof that contamination did not (or did) occur at the site. However, if there is contamination present, Phase 2 does not assess the extent of the damage or address a plan for cleanup.
For that, you need a Contamination Assessment.
Contamination Assessment
When environmental damage has been detected in the ESA Phase 2, the next step is to conduct a Contamination Assessment.
This assessment is used to determine the extent of the damage and will lay out a potential plan for and the estimated cost of remediation.
As a buyer, you’ll want to look at the contamination assessment very carefully. First, use the information to decide if you want to take on the liability of buying the property. Then, you can use it as a negotiating tool if you decide to move forward.
Vital Peace of Mind
The cost of environmental cleanup can easily run into hundreds of thousands of dollars or even more, depending on the extent of the contamination. Environmental Site Assessments give you and your lender the peace of mind that you won’t be taking on an unexpected liability when you purchase a property.
Don’t take that chance with your investment. Don’t even think about skipping the ESA when buying a commercial property.
