Environmental due diligence is a must for lenders, owners looking to sell, and prospective purchasers in commercial real estate transactions.  Depending on your role in the transaction it may prove beneficial (as well is often required by certain parties involved), to complete an assessment of the environmental conditions of a property prior to the transaction. This due diligence is often performed for the purpose of identifying and evaluating existing or potential environmental contamination on the property, and assessing potential liability associated with these findings. Environmental due diligence is primarily a product of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), a federal law passed in 1980 that created a special tax to fund a trust fund (commonly known as Superfund) to be used to investigate and clean up abandoned or uncontrolled hazardous waste sites.

The CERCLA imposes strict liability on certain parties for any contamination that may exist on a property. Called a "potentially responsible party" (PRP), they may be held liable to clean up contamination caused by the release of hazardous substances. In November 2005, the All Appropriate Inquiry (AAI) Rule was passed in response to the 2002 Amendments to CERCLA. The AAI rule required the U.S. Environmental Protection Agency (EPA) to define good commercial and customary practice for performing environmental site assessments (ESAs) for the purposes of establishing landowner liability protection (LLP) defenses to CERCLA liability. ASTM Standard (E-1527-05) meets the requirements of AAI and is the industry standard for performing Phase I ESAs for the purposes of establishing CERCLA liability protection.

Phase I ESAs are very thorough. They include (but are not limited to) a review of a government database listings of environmental significance for the property and surrounding area; a review of the property's history since first development through the use of historical aerial photographs, topographic maps, Sanborn Fire Insurance maps, city directories, and other records; an analysis of subsurface conditions (soil types and groundwater flow direction); a  site inspection; interviews with current and former owners of the property; and a review of records at local health departments, fire departments, building departments, etc. The price point of a Phase I ESA is typically in the neighborhood of $2,000, and takes a minimum of two to three weeks to complete.

What if CERCLA liability protection is not your motivation for completing environmental due diligence? Perhaps you are a developer looking at multiple properties and trying to decide which are best suited for your new development. Or maybe you are a lender who is fairly comfortable with the limited history of the property you gleaned from an auditor's website and former environmental assessments, but you would like an extra layer of comfort. The Phase I ESA can certainly help in both of these scenarios, but probably is not the most cost and time efficient tool for the job.

Another commonly used environmental due diligence assessment is the Modified Phase I ESA, or MP-1. This assessment is very similar in nature to the Phase I ESA, but the scope is narrowed, or "modified", to allow for quicker turnaround time and lower cost. The MP-1 still includes a site inspection, owner interviews, and a review of government database listings for the site and surrounding area. A review of historical sources of information as well as subsurface characteristics is still conducted, but on a lesser scale and often with fewer sources. Additionally, a review of local agency information (health department, fire department, etc.) is generally not conducted. With the modified scope of work, the reports are much less voluminous. An MP-1 report consists of a concise cover letter documenting the findings of the assessment, followed by a checklist documenting interview information and site reconnaissance activities. An MP-1 can be completed in one to two weeks for around $1,000. Although it does not afford CERCLA liability protections like its big brother, the Phase I ESA, the MP-1 is a very effective and quick tool for evaluating the environmental condition of property.

An even quicker assessment commonly used is the Records Search with Risk Assessment. As the title indicates, the scope of work includes a review of government database listings and historical sources to make an environmental risk assessment for a site. There is no interview or site inspection included in a RSRA, which allows for a very quick turnaround time (five business days) and low cost (around $550). The RSRA is commonly used by lenders looking for a quick environmental evaluation of a property on lower valued loans. It is also commonly used as a screening tool by developers looking to make early decisions on what sites may or may not be suitable for development. Like the MP-1, the RSRA does not afford CERCLA liability protections, but most clients aren't using it with that intention. It is an extremely quick and concise method that aids in making decisions based on potential environmental concerns.

Whatever the nature of the transaction or your role in it, some type of environmental due diligence assessment is prudent. August Mack has an array of services to suit your needs, as well as the experience to perform your due diligence assessments quickly and effectively. Our due diligence assessments will provide you with confidence in the environmental aspect of your transaction.

For more information, visit http://www.augustmack.com