Environmental Due Diligence

What is Environmental Due Diligence?

Environmental due diligence is a systematic process that evaluates the environmental conditions and risks associated with a property or land, whether commercial or residential, such as soil and/or groundwater contamination.

Its standards are provided by the Environmental Protection Agency (EPA).

The degree and form of assessment and management differ depending on the land and are decided by the Environmental Professionals (EPs).

It can be done at the request of land developers, lenders, attorneys, or private owners who want to purchase, refinance, or occupy a property.

When purchasing a property, there can be many hidden environmental liabilities associated with it that need to be evaluated.

The burden of responsibility for the toxic material is decided by a mechanism provided by the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), which authorizes regulators to fine property owners.

Even if the owner does not do the contamination, he/she has to dispose of the toxic chemicals at his/her expense.

The purchaser should conduct proper environmental due diligence if he wants to safeguard himself against this liability.

It contains reviews of proximity to sensitive habitats, historic structures and materials, operational procedures, cautious disposal of hazardous materials, and potential soil and groundwater contamination.

It is usually divided into two categories:

1. Traditional Environmental Due Diligence: This means ensuring that hazardous materials and pollutants are appropriately identified, managed, permitted, and alleviated.
2. Natural Resources Environmental Due Diligence: It ensures that natural resources, including wetlands, waters, endangered species, historical places, etc., are correctly identified, mitigated, and permitted.

The objective of performing diligence is to ensure that your organization complies with environmental rules and regulations and is protected against environmental accidents, such as soil and/or groundwater contamination.

It is done to quantify financial and legal risks and to identify any existing or previous environmental contaminants.

Why is Environmental Due Diligence Important?

It is a proactive liability protection measure for reducing risks and avoiding unnecessary expenditure, such as protection from project failure or stunting development by officials and fines.

It also helps maintain positive public relations and leads to long-term capital gain. For this, management would have to take appropriate measures.

Executing it results in expert evaluations of a property's environmental impacts and related effects.

It is based on the polluter pays principle, which says that one who causes pollution is responsible for cleaning it too.

But, if a person or organization purchases or inherits land that is already polluted and the previous owner responsible for the pollution cannot be found, or there is not sufficient proof to prove his burden. The new owner will be liable to clean up and remediate any negative environmental impact.

It also helps in knowing the liability for clean-up operations and avoids fines.

One can protect himself/herself from liability under CERCLA by conducting proper due diligence, even if contamination is found after the transfer of ownership.

It gives stakeholders, including investors, lenders, statutory bodies, and buyers, more trust by increasing transparency and their level of loss exposures.

Environmental Site Assessment (ESA)

Environmental Site Assessment (ESA) is a type of due diligence in the form of a report of a real estate asset to identify existing or possible environmental contamination or pollution.

The analysis suggests physical improvements to the real estate asset.

It reviews the land’s previous or current use to decide if it is impaired by a Recognized Environmental Condition (REC).

ESA is an essential process that should be done before buying a commercial property to avoid the inheritance of liability of the previous owner.

Triggering Actions For An Environmental Site Assessment

The events that can trigger an environmental site assessment are as follows:

1. Due diligence is performed when a property or a business is being sold or purchased to know if it is facing any current or possible environmental liability, such as lack of licenses, hazardous material contamination, violation of permits, and enforcement deficiencies.
   • It helps the purchaser to understand the possible restrictions, obligations, and hazards associated with the land.
2. Before refinancing a property, the bank performs an environmental site assessment to know possible environmental contamination risks.
3. Suppose someone is transferring his/her property to his/her family members after retirement. In that case, he/she should conduct an Environmental Site Assessment to ensure it does not have an environmental liability.
4. The regulatory agency can also ask the owner to assess the environmental site.
5. Environmental site assessment can also be performed at the will of the existing owners to know about the contamination history of the real estate asset.

Environmental Site Assessment: Phase I

The first step in the due diligence process is to carry out a phase 1 or level 1 Environmental Site Assessment (ESA). 

It is used to determine and analyze a property’s current and past events, the contamination of soil and groundwater, and current or potential environmental pollution obligations.

It can be advised by a business advisor or done during the borrowing period at the request of a bank.

The revelations from a phase 1 environmental site assessment are used to give an independent expert opinion on the property's environmental condition and its impact on the valuation of the property or any effects on an innocent property owner after acquisition.

It includes the following:

• Review past use of the property through historical records, regulatory records, agency records, and public documents such as topographic maps, fire insurance maps, historical aerial photos, etc.

• Conduct site visits and inspections to observe current and historical conditions and uses of the property and adjacent properties. 

• Interviews with the present and past property owners, managers, renters, or other individuals familiar with the property.

The assessment does not involve real samples, such as groundwater.

However, requirements under the American Standard for Monitoring and Components (ASTM) need to be followed, which includes addressing the issues associated with soil vapor degradation and the contingency of vapor migration having a potential danger to on-site and off-site tenants.

Environmental Professionals (EPs) analyze the findings to know the possible environmental hazards to the land caused by current or historical activities. 

He/She summarizes the issues found in the property and possible steps that can be taken to resolve the problems.

A suggestion to conduct a phase 2 Environmental Site Assessment (ESA) is given if a Recognized Environmental Condition or REC is found.

Environmental Site Assessment: Phase II

If a recognized environmental condition is discovered in Phase 1, most land developers and other stakeholders request a Phase 2 environmental site assessment to understand the pollutants and potential effects better.

It requires collecting and analyzing samples, such as soil and groundwater, to comprehend pollutants like petroleum hydrocarbons, pesticides, heavy metals, asbestos, solvents, etc.

The scope of a phase 2 ESA includes areas and chemicals of concern, local geology, site access issues, etc.

The guide by the American Society of Testing and Materials (ASTM) provides the standards to comply with federal and state regulations on the proper conduct of phase 2 environmental testing.

Different investigations are conducted depending on the findings of the phase 1 ESA to test for various contaminants:

• Surface soil sampling

• Surface water sampling

• Soil vapor sampling

• Subsurface soil boring

• Groundwater monitoring well installation

• Underground Storage Tank (UST) Testing

• Geophysical testing for drums or tanks buried underground

• Sampling contents of drums left on a site

• Sampling transformers/capacitors for polychlorinated biphenyls

• Evaluations of chemical fate and transport

• Risk Assessment and Modeling

If a land developer does not want to conduct a complete ESA, then he/she can opt for a limited Phase 2 sampling. Still, the findings will be limited by the sample's locations, number, media type, or combination.

Environmental Site Assessment: Phase III

After getting an idea of the contaminant levels that exist on the property, a Phase 3 Environmental Site Assessment (ESA) is conducted to know and implement potential remedial solutions. Next, a broader site investigation is done.

Phase 3 entails a more thorough site analysis and is a crucial prelude to any site cleanup operations. 

It includes rigorous preparation, sampling, tracking, modeling, fate and remediation tests, and probability studies for corrective and remediation plans. In addition, the possible clean-up approaches, logistics, and costs are analyzed.

Tests like the assessment of subsurface soil, sediment testing, groundwater testing, and the determination and analysis of groundwater and soil contaminant pathways are often needed.

A strategy for additional site investigations and an assessment of the best corrective solutions may also be included in this phase. Finally, phase 3 of ESA quantifies the contamination levels.

Analysis of soil contamination levels can be done in a day, but analysis of groundwater contamination is more challenging and costly and may take months or years to complete.

The construction of a site remediation plan that complies with environmental regulations at the federal, state, and local levels will be made possible by the findings of a Phase 3 ESA.

Recognized Environmental Condition (REC)

ASTM defines the recognized environmental condition in the E1527-21 standard as follows:  

1. The presence of hazardous substances or petroleum products in, on, or at the subject property due to a release to the environment; 
2. The likely presence of hazardous substances or petroleum products in, on, or at the subject property due to a release or likely release to the environment; or 
3. The presence of hazardous substances or petroleum products in, on, or at the subject property under conditions that pose a material threat of a future release to the environment.”

A de minimis condition is not a recognized environmental condition. Instead, it identifies environmental responsibility in the phase 1 Environmental Site Assessment (ESA) context. 

It is also termed Areas of Potential Environmental Condition (APEC). It can occur in the concerned property or any other property adjacent to the questioned property.

For example, historical gas stations and car repair centers where underground storage tanks or subsurface features can remain in the estate are examples of recognized environmental conditions.

What Type of Environmental Liability could a Land Developer have?

Suppose a land developer’s property does not have a Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) protection, and a recognized environmental condition is found on it. In that case, the landowner gets the liability for the cleanup. 

If the pollution has moved to adjacent properties, he/she is also probably liable.

He/she is also liable for any contamination caused by the waste from his/her property to the place where it has gone for treatment or disposal.

Noncompliance, violations of environmental laws, lack of permits or approvals, and costs associated with projects agreed to as part of a noncompliance settlement may all result in fines and penalties.

Environmental protection laws and regulations must be followed, and land developers who do not may be subject to civil or criminal fines and penalties.

Fines and penalties can range from small sums to millions of dollars for each infraction.

In addition, a land developer is subject to tort liability if he/she claims physical harm, wrongful death, medical monitoring, or property damage resulting from a recognized environmental condition or exposure. 

Tort liability may result in high court costs for civil and criminal cases.

CERCLA Requirements

The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) establishes the process that decides who is liable for any hazardous substances or material on a property. 

CERCLA targets to clean contaminated sites and checks contamination of future sites by involving the liable parties.

Just by holding a contaminated property, a person becomes liable to pay fines and undo it at their expense, regardless of whether they are responsible for the contamination, making it even more necessary.

Two kinds of actions are required in such cases- short-term removal or emergency response and long-term remedial actions.

The former actions are taken to eliminate a release immediately or threatened release that may be dangerous to the environment.

The latter actions are only conducted at properties listed in the U.S. EPA’s National Priority List (NPL) and involve more extensive studies and action periods but provide more permanent solutions.

The following sequence of events generally applies to a property under CERCLA requirements for long-term remedies:

• Preliminary assessment

• Site investigation

• Listing on the National Priorities List

• Remedial investigation

• Feasibility study

• Record of decision

• Remedial design

• Remedial action

• Long-term operation

• Maintenance

What Types of Reports Help with Environmental Due Diligence?

Anyone intending to purchase a property, whether commercial or residential, must undergo it. When buying a property without performing it, you incur the huge risk of encountering hidden environmental liabilities.

It is known to evaluate a property for any potential danger of environmental pollution. 

The Environmental Protection Agency (EPA) establishes the rules and criteria for this procedure. Then, they choose the required evaluation form based on the property's characteristics.

To carry out the process of environmental due diligence, the following reports are generated:

Environmental Questionnaire

An environmental questionnaire is a pre-loan qualification method used by lenders, which involves screening the ecological risks associated with a property undergoing a transaction.

This questionnaire is a preliminary report that combines the known information about a property with a basic idea of pollution and health risk.

Usually, the pre-loan qualification procedure includes an environmental questionnaire. The form is also applicable to sales and title transfers.

In the end, any potential contamination could prompt ordering a Phase 1 environmental report, desktop report, or transaction screen assessment for better risk management.

Thus, the services of an environmental specialist are necessary if a risk assessment reveals any possibility of environmental risk.

Desktop Environmental Report

A desktop environmental report is a limited-scope, cost-effective environmental assessment due diligence report that excludes an environmental consultant's visit to the subject site.

It entails a preliminary screening of a property to assess its liability risk.

Depending on the requirements of a land developer, a desktop environmental report's scope will probably be modified. However, it typically includes one or more of the following elements:

1. Review of Environmental Records and Databases: This report examines state and federal environmental databases in search of data on real estate contamination and other environmental problems that have been reported to state and federal agencies.
2. Review of Historical Records and Databases: This includes looking at historical records with views about the environmental danger of a site, such as aerial images, historical topographic maps, fire insurance maps, and city directories.
3. Environmental Historical Study: This report offers outstanding value at a fair price for low-risk asset classes. To persuade the lender or investor that the property has always been low risk, the historical environmental report evaluates many of the same historical resources as in the Phase I environmental site assessment.
   • This report, one of the ones needed by the Small Business Administration's (SBA) environmental policy for SBA lenders, is identical to the Historical Records and Database Review.
4. Custom Products: Users can also get a specifically tailored report to meet their needs.

Environmental Transaction Screen

An Environmental Transaction Screen (ETS) is a screening tool designed to help those who only want to do limited due diligence to find any potential environmental issues.

A Phase 1 Environmental Site Assessment can be replaced with an Environmental Transaction Screen Assessment.

However, the majority of the time, they are only advised for low-risk property types that already have historical data available. 

The following are included in an environmental transaction screen:

• A site visit

• Review of regulatory records

• Interviews with key personnel

• Limited historical investigation

Feasibility Study

In a feasibility study or analysis, recent and historical information about a property and its surroundings is gathered.

Data is analyzed to estimate future requirements for the entire approval process and the types of projects viable for the site.

Lenders and commercial real estate companies frequently use feasibility analyses.

The following are included in a feasibility study:

• Basic site information

• Utility infrastructure

• Physical site information

• Site conceptual layout

•  Permitting information for all jurisdictions

• Estimated construction costs, their effects, and permitting fees

Critical Issues Analysis

The term "critical issues analysis" is frequently used in the renewables sector and is quite similar to the concept of a "desktop environmental report."

These reports will contain all the conventional and natural resource environmental due diligence. Still, they may also contain some additional details specific to the project that would not be included for other industries, such as:

• The amount of direct solar radiation available (for solar power) or 

• The average wind speeds (for wind power).

Some elements that would be more relevant to the renewable energy sector specifically include the following:

• Wind velocity

• Wind direction

• Roughness of terrain

• Seasonal cycles

• Air pressure

• Average and seasonal air temperature

• Tree cover

• Direct solar radiation availability

• Cloud cover

• Distance from transmission lines

Who Performs Environmental Due Diligence?

Whether you are planning an oil and gas project, developing property for renewable energy, or working in commercial real estate, you will probably require the assistance of an environmental expert to carry out adequate due diligence.

Additionally, new products on the market clarify ecological provisions and aid in regulatory compliance.

Environmental consultants are often hired to perform it.

To detect and reduce risks that could result in legal action or financial penalties and assure compliance with existing legislation, environmental consultants integrate their scientific knowledge with their skills and awareness of regulatory requirements.

Environmental consultants conduct both desk-based research and fieldwork and present their customers with thorough reports on their findings and suggestions for future land developments.

The cost of an environmental consultant will vary depending on the size, history, location of a property for land development, and the service required. These expenses may cost anything from $1,000 to more than $10,000.

Software-as-a-service (SAAS) solutions are available for land developers who want to safeguard their projects from environmental and cultural effects that can later harm a project and its profitability.

Researched and authored by Harveen Kaur Ahluwalia | LinkedIn

Reviewed and edited by Parul Gupta | LinkedIn

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