Conducting a Commercial Real Estate Environmental Due Diligence

Conducting a Commercial Real Estate Environmental Due DiligenceEnvironmental due diligence – the assessment of known and potential environmental liabilities and obligations associated with a piece of property – is an integral part of any commercial real property transaction. But both real estate buyers and sellers have many questions about environmental due diligence, including:

  • When is an environmental due diligence required?
  • What’s the scope?
  • How long does an environmental assessment take?
  • How much will it cost?

The answers depend on the property being sold or purchased – not all real estate transactions are created equal, nor does every sale or purchase require the same level of due diligence. For example, the purchase of a former dry cleaner site will likely require more in-depth due diligence than the purchase of a site that housed office space.

Environmental Regulations

Federal and state laws regulate environmental due diligence, and they mirror one another and work together to impose liability and hasten environmental cleanup.

The most significant environmental regulation is the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980(CERCLA), commonly known as “Superfund.” Under CERCLA, the U.S. Environmental Protection Agency or a private party can sue a current or past owner or operator of a contaminated property for costs associated with environmental cleanup. Most states, including Michigan, have their own versions of CERCLA.

In general, CERCLA holds owners responsible for cleaning up contamination on their property, even if they did not cause or contribute to the problem. Notably, CERCLA liability is joint and several. This means any liable party may be required to clean up all the contamination, even though that party only caused a small amount of the overall contamination.

Scope of Due Diligence 

The scope of environmental due diligence depends on various factors, including the characteristics of the property, its prior uses, any known contamination on the property or a nearby property, and the anticipated use of the property. The analysis typically focuses on these areas:

  • Known or potential soil or groundwater contamination
  • The potential for contamination to migrate to the property from surrounding property
  • The risk for hazardous soil vapors from contamination underneath the property
  • The presence of hazardous building materials, such as asbestos and lead-based paint
  • Ensuring compliance with environmental regulations

When a real estate transaction involves the development of a building or other project, the property may also need to be examined for features like protected wetlands or endangered species. 

Phase I and Phase II Assessments 

The most common methods for identifying potential or existing environmental contamination are the Phase I and Phase II Environmental Site Assessment (ESA).

A Phase I ESA is an investigation into past and current ownership and uses of the property to assess the possible existence of contamination. While a Phase I investigation must be conducted by an environmental professional, it does not include any sampling or testing of the property but instead involves:

  • A review of public records;
  • A visit to the site;
  • Interviews of owners, occupants, and local government officials; and
  • A final report on possible contamination.

The purpose of a Phase I ESA is to identify potential environmental conditions that may affect the property or trigger liability and helps to determine whether further due diligence is needed and whether a Phase II ESA must be conducted.

A Phase II ESA further investigates the presence of contamination and quantifies the potential environmental contaminants identified in Phase I. Unlike a Phase I assessment, however, a Phase II ESA is invasive, typically requiring the collection and testing of soil or groundwater samples and/or building materials.

Environmental Liability Defenses

If environmental contamination is found during a due diligence assessment, affirmative defenses are available that may absolve a buyer’s or seller’s potential liability.

Typically, a Phase I and, where needed, a Phase II, are necessary prior to purchase to avoid liability for any existing contamination. Under Michigan law, buyers of contaminated commercial property which is deemed a “facility” under state law must also obtain a Baseline Environmental Assessment (BEA) from an environmental professional. The BEA is intended to identify the existing contamination so the state can delineate the existing contamination from any contamination which occurs after the buyer purchases it. If a BEA is obtained prior to or within 45 days after closing, it can protect the buyer from the obligation to clean-up such the existing contamination.

There are other legal defenses too, so it is very important to hire experienced environmental professionals and attorneys who know what they are doing before you agree to purchase any commercial real estate. In fact, you should not sign an agreement to purchase real estate before consulting with a real estate attorney or other qualified professional.

Due Diligence Tips

If you are a buyer, a seller, or have another interest in real property and an environmental due diligence looms on the horizon, here are some ideas to keep in mind:

  • Make sure time is on your side. Include due diligence in the transaction timeline. Start the due diligence process early because, if not, it may be too late to address issues and real estate closings may be delayed.
  • Remember: property comes with a past, present, and future. When purchasing real property, never ignore its environmental history. Financing is often tied to identifying and addressing environmental concerns, including those from years past.
  • Know the lender’s policies. Every lender has its own financial requirements and levels of environmental risk tolerance. Know and understand the bank’s environmental policy position as soon as possible. That way, surprises can be avoided.

If you have questions or concerns regarding environmental liability, please contact Kreis Enderle. Our experienced real estate attorneys can discuss your situation and guide you through the complex due diligence process.

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