When it comes to purchasing real estate, especially commercial real estate, one essential rule of thumb that buyers, investors, lenders and appraisers need to go by is take nothing at face value and take nothing for granted! It’s as simple as this.
Too many buyers are still unaware of the risks that property owners face for environmental contamination and shoddy, incomplete paperwork. Solid investigation and environmental due diligence are essential to the process of purchasing (and selling) commercial property, especially before paperwork is even drawn up to purchase said property.
Here at Essel Environmental Engineering we know the dire importance of due diligence and it being implemented thoroughly and completely before any real estate transaction is transacted. Our knowledge and experience remain a service we provide all our clients. And one we don’t mind providing you who may be a visiting reader to our website. So, our Concise and General Environmental Due Diligence Checklist herewith is for them and for you!
Let’s Start at the Beginning
An environmental due diligence checklist consists of several main areas of concern. All of which must be addressed and covered thoroughly and in fine detail. A real estate investment, especially of a commercial property kind, involves more than only an investment of a large sum of money. It is an investment of time, often a considerable amount of time, and the precious time of often hundreds of other stakeholders, co-investors, banking and real estate officials, and so many other people.
For the buyer and would-be new property owner, it is a huge investment of money and time as well as hard work and heart and soul! So due diligence is not only essential at the onset of a real estate transaction and/or commercial project, it is critical and can be life-altering.
Matters of Title, Survey and Zoning
This is the first order of business: determining the history of the property and making certain every bit of its history is discovered and known. This checklist includes the following items:
- Select the title company
- Receive/review seller’s title commitment and underlying documents; and forward to title company
- Order current title commitment and underlying documents
- UCC and judgment lien searches
- Receive and review existing survey
- Order new ALTA survey (or updates)
- Subdivision and parcel maps
- Restrictive covenants, easements and agreements
- Local improvement district information
- Verify leases, entitlements and other assets are in seller’s name or that appropriate assignment documents exist
- Confirm releases available from current lienholders (if applicable)
- Deliver title and survey objection letter to seller (if applicable)
The Environmental Due Diligence Audit
The fact is, identifying property liabilities: audits and inspections are more than just regulatory compliance and obeying the rules.
An environmental due diligence audit is the cornerstone to your due diligence checklist and one of the most important tools in any real estate transaction. Its purpose is to identify, diagnose and severely diminish or eliminate and potential problems and liabilities.
In other words, a due diligence audit is essential for finding and assessing problems which could have a negative impact on the property’s health and safety. Without a thorough and proper audit, the buyer of a property could be putting himself and others at grave financial and legal risk. And without even knowing it. The most necessary components of such an audit include:
- Ensuring regulatory compliance to reduce the potential for fines
- Reducing non-regulatory liabilities
- Reducing potential issues in the event of a property transaction
- Reducing energy and waste costs
The environmental audit is the most important component of your environmental due diligence checklist. It is the best means to identify and remedy environmental issues before they become a major concern. And occurs by self-initiating the due diligence audit process. Although there are many standards for environmental audits (such as the ISO 14010), four areas that must be addressed (if needed) in the audit are the following:
The ESA Phase 1
Perhaps the most essential element of any due diligence checklist and property assessment is the Phase I ESA (environmental site assessment). It is usually scheduled by buyers who aren’t sure if there has been any contamination of the property in question. This is one of the most necessary components of a real estate transaction because it is one of the most fundamental and will determine whether there will be a need to spend time considering other due diligence options.
The ESA Phase II
Notably similar to the Phase I ESA, the main difference boils down to what the property owner knows about the property. For example, if there has been a known chemical spill or infestation, the Phase II ESA is selected because of the urgency required to quickly correct the situation. One should choose the Phase II ESA if the property’s health is at risk or considered at risk.
Beyond the Phase I and Phase II Environmental Site Assessments, soil remediation is a consultation service that needs to be scheduled when action must be taken immediately to remediate the contamination. In the event of soil contamination, such remediation will help restore the ground back to a clean state of health and legal acceptability.
Some of the urgent groundwater issues that must be thoroughly examined and assessed is being able to predict well hydraulics, stream-aquifer interaction, interference effects, localized infiltration; and being aware that contaminant transport can be difficult without the assistance of groundwater hydrologist services. This service is scheduled when one needs to collect precise data on the flow of property groundwater and the contaminants that may be potentially present.
Summary and Conclusion
Remember that both the buyer and seller in a real estate transaction have a stake in the property assessment and due diligence that are conducted. Lastly, it’s important that every major stakeholder involved in a real estate transaction needs to be cognizant and aware of these last five components of the environmental due diligence checklist:
- Take caution when approaching potential contaminants
- Walk the entire property to ensure a complete and thorough survey
- Conduct accurate calculations of collected data
- Read and review local documents for the full property history
- Obtain necessary insurance based on the investigation
Following your due diligence checklist thoroughly and precisely should guarantee your property has been assessed in compliance with all local state regulations, laws and rules. And make your real estate transaction move to completion and achieve success!