What is Environmental Due Diligence?
Environmental due diligence is a legal and technical investigation conducted to satisfy certain liability protections using state and federal environmental laws or standards. Due diligence can also be used to develop information about environmental conditions used to allocate liability and manage environmental risks.
Environmental due diligence is a systematic procedure that evaluates a property or land for possible environmental contamination risks, such as groundwater or soil contamination. The Environmental Protection Agency (EPA) provides standards for due diligence. Environmental Professionals (EPs) shall decide the degree and form of assessment warranted, which may differ depending on the land.
The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) provides a mechanism for deciding who ultimately is responsible for the toxic materials. The legislation authorizes regulators to fine property owners. It mandates the disposal of toxic chemicals at the owner’s expense, even if the owner was not responsible for the contamination.
Proper environmental due diligence evaluations will protect purchasers against the significant burden of environmental liability under CERCLA, even though contamination is detected after the purchase.
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Environmental Site Assessment (ESA) refers to a report that is prepared for any real estate asset identifying possible or existing environmental contamination.
ESA is an essential part of due diligence when buying a commercial property, and it should be done before closing the deal.
Recognized Environmental Condition (REC) recognizes environmental liability in the context of Level I of Environmental Site Assessment.
When Is Environmental Due Diligence Required?
Lending institutions typically require environmental due diligence before they will finance a real estate purchase, refinance an existing loan, or accept collateral for a construction loan. If a property is held as collateral for a loan, environmental due diligence is also usually required, as any problems would compromise the collateral property’s value.
Environmental due diligence is also often required by public agencies before they release grant funding for projects related to real estate developments and improvements.
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Why is it Important?
Environmental Due Diligence is a form of proactive environmental management. As mentioned in our blog from last week, ‘Proactive Environmental Management and Why it Matters’, there are a number of reasons why a proactive approach to environmental management is important. These include (but are not limited to):
- Avoidance of legal prosecution;
- Top Management support and involvement in environmental attitude and performance;
- Positive public relations;
- Long-term capital gain;
- Improved environmental performance.
In addition to being proactive, unrecognised environmental liabilities and/or permit requirements can prove costly for organisations. By executing EDD, an organisation will have awareness of historical environmental aspects and permit requirements that might produce large remedial bills in the future. This also allows for the appropriate management measures to be put in place.
Furthermore, Environmental Due Diligence is closely linked to the ‘polluter pays principle’ as set out in the Environmental Damage (Prevention and Remediation) (England) Regulations 2015. The ‘polluter pays principle’ states that any producer of pollution will be responsible to pay for its clean-up and remediation.
This links to EDD because if an organisation purchases or inherits land that is already polluted, and the previous occupier cannot be found and/or there is no evidence to support the claim that the pollution was caused by the previous occupier, the burden to clean-up and remediate any negative environmental impacts of the pollution is also inherited.
Thus, EDD can aid in an organisation’s understanding of their liability for clean-up operations, provide defence against prosecution and mitigate the amount of any imposed fines.
Environmental Due Diligence Can Protect You
Proper assessments made through environmental due diligence can protect you from the potentially crippling environmental liabilities under CERCLA, even if contamination is found after the purchase is made. Protection under the CERCLA is for owners, innocent landowners, and bona fide prospective purchasers.
To demonstrate qualification for one of these parties, All Appropriate Inquiries (AAI) must be conducted prior to acquiring the property. This means conducting environmental due diligence through a Phase I Environmental Site Assessment (ESA), which is where most due diligence investigations begin.
A Phase I ESA investigates the current and historical uses of a property to identify potential environmental risks. In addition to demonstrating that AAI were taken, continuing obligations must be followed during property ownership. Continuing obligations include exercising appropriate care with respect to hazardous substances and complying with land use restrictions.
Aside from CERCLA, be sure to follow any laws set forth by state, local, or federal regulations for assessment requirements and liability protection. It is worth noting that hiring a well-qualified environmental consultant and carefully defining your goals with the consultant is crucial for ensuring a proper assessment.
Additionally, conducting due diligence early during the acquisition process is necessary, because the discovery of post-acquisition liabilities holds the current owner responsible for remediation.
Who Performs Environmental Due Diligence?
Whether you are a renewable energy land developer, an oil and gas project planner, or are working in commercial real estate, you will likely need the help of an environmental professional to perform proper due diligence. There are also new tools in the marketplace that help with regulatory compliance and explain ecological provisions.
Environmental due diligence work is typically outsourced to environmental consultants. Environmental consultants combine scientific knowledge, their understanding of regulatory requirements, and expertise to identify and minimize risks that would result in legal action or fines and ensure compliance with current laws.
By performing desk-based research and fieldwork, environmental consultants provide clients with detailed reports on their findings and recommendations for their clients’ land developments.
Depending on the size, history, location of a property for land development, and the service needed, the cost of environmental consultants will vary. These costs can range anywhere between $1,000 to $10,000+.
For land developers who want to protect their projects from environmental and cultural influences that could impede a project and its profitability down the line, there are software-as-a-service (SAAS) solutions. Environmental due diligence software platforms, like Transect, generate on-demand reports that reveal risks from threatened and endangered species, jurisdictional waterways and wetlands, protected areas, flood hazards, and more within minutes.
In addition, these solutions help identify the need for additional field studies such as wetlands delineations, protected species habitat assessments, or cultural resources studies before hiring a consultant, which helps save significant amounts of time and money.