Environmental due diligence is a step that should never be skipped, even if you are worried about upfront costs, since it can lead to significant legal, financial, and reputational consequences down the road. These costs will far outweigh any initial savings that you might have mustered by skipping this step.
If you are thinking about buying a commercial real estate property soon as an investor or developer, failing to assess commercial real estate risks properly can turn a promising property deal into a long-term liability.
Our environmental due diligence guide can help in preventing this mistake.
What Is Environmental Due Diligence?
At its essence, environmental due diligence is about checking a commercial real estate property for environmental hazards or potential contamination.
This typically includes conducting a Phase I Environmental Site Assessment, which identifies potential risks by reviewing:
- Historical land use
- Regulatory records
- Site conditions
If concerns are found, a Phase II Environmental Site Assessment may follow, involving:
- Soil
- Groundwater
- Building material testing
Phase 1 environmental assessments should be conducted by environmental professionals who are experts in the field.
Costs of Ignoring Environmental Due Diligence
If you skip the environmental due diligence step, you might not find out that the land you are planning to purchase has hidden contamination issues, like:
- Underground storage tanks
- Chemical spills
- Asbestos-containing materials
This can result in commercial real estate risks as listed below.
Financial Liability
Under laws like the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), property owners are potentially responsible for cleaning up contamination, even if they did not cause it. If you end up with a property in hand that has serious contamination issues, it can cost you quite a bit to clean it up.
Impact on Property Value
Contaminated properties are harder to finance, insure, or sell. Lenders may require environmental reports before approving loans, and insurers may exclude coverage for pollution-related claims.
Legal Complications
You don't want to deal with fines, penalties, or other litigation due to contamination issues, but that's what will happen if you don't get a proper environmental risk assessment done on a property before purchasing it.
Reputational Costs
Companies associated with environmental negligence may face public scrutiny, negative media coverage, and damage to their brand.
No one wants to be associated with a contaminated property or anything damaging to the environment, especially nowadays, where consumers are obsessed with green living and where environmental, social, and governance (ESG) considerations are increasingly important.
Property Investment Strategies Must Include Environmental Assessments
There's no way for you to predict the future, but with environmental due diligence, you can at least prevent yourself from being the brunt of litigation, financial complications, and reputational damage.
Protect your investments, ensure regulatory compliance, and make more informed decisions in an increasingly complex real estate landscape using thorough environmental assessments. Forget about saving a few pennies to lose a few hundred or more dollars in the future.
Please check out related articles on our website to stay informed on a wide variety of topics.
This article was prepared by an independent contributor and helps us continue to deliver quality news and information.
