Investing a commercial real estate could be very risky. Returns made on investment depends on the constantly changing natural hazards, real estate market, loan terms, or the success of tenants, etc. One of the greatest risks can be traced to the potential for certain environmental liabilities which relates to a property. An environmental liability for an owner can possess enormous financial ramifications, and can strongly affect the ability to utilize or lease a property. Thus, an environmental due diligence, especially a Phase I Environmental Site Assessment (ESA), is a critical and great step in selecting the right property. Users and investors alike can focus on the structural integrity, location, and the value of commercial properties; however, an appropriate environmental due diligence is just an important piece of this due diligence puzzle, it can be seen as the most important.
Below are reasons why carrying out an environmental due diligence should be treated as a priority in the process of selecting and vetting any commercial real estate.
#1: Federal Liability Protections
The original intention of the Phase I ESA was to provide for a framework for an “appropriate due diligence” for aiding in the protection of purchasers from the federal Superfund Liabilities under the Comprehensive Environmental Response, Compensation, and Liability Act(CERCLA) legislation, commonly called Superfund. Per federal regulations, and appropriate due diligence can help in protecting any prospective purchaser from existing federal CERCLA liabilities. Even if a properly conducted Phase I ESA fails in identifying environmental concerns relating to a property, the fact that a proper Phase I had been conducted, can provide the owner of the property with protection from all federal liabilities in a case when it is later discovered that the property had been contaminated.
#2: Monetize Environmental Impairments
Irrespective of what the scenario is, if contamination is noticed to exist at any property, there is always a remedy. Of course, a property may get remediated under regulatory oversight and transacted easily once a “letter of closure” is obtained; however other options still exist. If the contamination extent can be quantified, it usually requires a Phase II ESA, a cost for property remediation could be established and the right discount rate can also be applied to the purchase price or kept in an escrow account.
#3:Prospective purchasers/future lenders will require one
Assuming you are purchasing a property in cash and you’re a bullish investor. You may get tempted by a quick close and a good deal. However, this strategy may be shortsighted. Normally cash investors will desire to secure financing in order to free up cash. The problem associated with these strategies is the likelihood that a lender might get involved sooner or later. Now, either your prospective buyer or you will be forced to perform an ESA soon, and as the owner, you will be held responsible for any serious contamination problems found in that process. That is why you need an ESA such as the Ortam Group phase 1 environmental site assessment.