Managing Financial Risk: The Importance of Environmental Due Diligence
By Michael Wade and Keith Kaylor
Is there an environmental liability lurking in the commercial property your client is preparing to buy?
And how can you find out?
Many commercial properties do have potential environmental issues, and purchasers and lenders may unknowingly be taking on substantial risks from loss of property value or liability for remediation costs. That is why conducting environmental due diligence is crucial.
Fortunately, there are several types of investigations that can be done to minimize the liability.
The regulatory basis for these investigations is the “All Appropriate Inquiries” rule established by the U.S. Environmental Protection Agency (EPA) in 2005. The rule established the level of environmental due diligence required of buyers and/ or lenders wishing to qualify for liability protections from cleanup costs. The industry standard for conducting due diligence investigations is the American Society for Testing and Materials (ASTM) Standard E1527, last revised in 2013.
The most common types of investigations used are:
- Desktop Reviews
Desktop reviews are a low-cost alternative to a Phase I Environmental Site Assessment (ESA), and have a limited scope. They consist of:
- Reviewing environmental databases in order to find hazardous material sites on the subject property or nearby properties;
- Reviewing one historical land use source (usually aerial photographs); and
- Questionnaires filled out by the borrower and loan officer.
Desktop reviews do not include a site visit and do not meet the ASTM standard. Therefore, there is a possibility that environmental issues may remain undisclosed. In addition, if any issues are discovered, they cannot be fully investigated due to the limited scope, and will lead to a recommendation for a Phase I ESA. Unless the lender has other knowledge that the subject property is of low risk, a desktop review is probably best used as a screening tool only.
- Phase I ESA
A Phase I ESA is the industry standard for due diligence investigations. It consists of:
- A review of environmental databases in order to find hazardous material sites on the subject property or nearby properties;
- A review of all readily available historical land use information (aerial photographs, city directories and fire insurance maps, as available);
- A site inspection of the property;
- A review of local government records concerning the property; and
- Interviews of the site owner and/ or occupants.
- Review of environmental agency records to determine if the site is in compliance with regulations (especially important for sites handling regulated materials such as service stations or hazardous waste generators)
Phase I ESAs meet the ASTM standard, but do not include sampling of soil, groundwater, or building materials. This report will identify any potential or actual Recognized Environmental Conditions (RECs) on the subject property. The environmental professional developing the Phase I ESA report may also make recommendations for further investigation to evaluate the presence or absence of contaminants at the subject property, which may lead to a Phase II ESA.
- Phase II ESA
If environmental contamination of soil, groundwater, or soil vapor on the subject property is suspected, a Phase II ESA may be performed to determine if contamination is present. Sample locations should be selected based on areas considered most likely to contain contamination. Samples should be submitted to an accredited laboratory for analysis to ensure the legal acceptance of the analytical data. If contaminant concentrations are above state reporting levels, the property owner has the legal responsibility to report these results to the Georgia Environmental Protection Division (EPD). The EPD may ask for further investigation under the Underground Storage Tank (UST) program for service station sites. Most other sites (such as dry cleaners or auto repair) will be handled under the Hazardous Site Response Act (HSRA) Program.
- UST Investigations
Once a release from a UST site is reported, the EPD will usually require a Corrective Action Plan – Part A (CAP-A). The CAP-A may require additional groundwater sampling and additional research to determine nearby receptors, such as the nearest drinking water well.
Depending on the results of the CAP-A, additional investigations such as a CAP-B and remediation may be required, which can involve substantial costs. However, if the site owner has been contributing to the Georgia UST Trust Fund and is not found to be ineligible, the Trust Fund will reimburse the owner for remedial costs, minus a $10,000 deductible and the cost of the trust fund application. Therefore, it is crucial for lenders to ensure that owners of UST sites are in compliance with Georgia regulations before issuing a loan.
- Brownfields (HSRA) Investigations
When a reported release is minor, the Georgia EPD may issue a “No Further Action” letter. For more seriously contaminated sites, further investigation will be required. Unlike UST investigations, there is not a trust fund to help in remediation cost for HSRA sites, so the buyer may incur extensive liability. This cost liability should be a determining factor in the decision to buy a parcel and should be the driver for conducting environmental due diligence before acquiring land.
If the site goes into foreclosure or resale, the Georgia EPD Brownfields program offers incentives for subsequent owners to assess contamination and remediate the property. The program includes tax incentives, as well as relief from the liability to perform groundwater remediation, if soil contamination has been removed.
In conclusion, an environmental due diligence process can be implemented at various degrees of thoroughness. A buyer or lender should consider the potential liability associated with owning a parcel of land that is known to be contaminated. Liability can be limited through a better understanding of the severity and source of impacts prior to purchase. We recommend utilizing a knowledgeable and experienced environmental consultant and choosing the right level of investigation at the onset to help buyers and lenders to avoid substantial liability issues later.
Michael is the General Manager of BAT Associates, Inc., GABB Affiliate member. Michael is a graduate of Whittier College, earned his Master’s from San Jose State University, and his MBA from the University of New Mexico. Keith Kaylor, P.E., is a graduate of Cleveland State and is responsible for managing Phase I/II ESAs and remediation projects at BAT Associates. Both have performed environmental site assessments and provided environmental and engineering consulting services across several US states over the past 30 years.
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