INDUSTRY U P DAT E S
REDUCING RISK WITH
Environmental
Due Diligence by Karen McCurdy
W
hat is environmental due diligence and why would someone spend time and money to do it? Broadly, environmental due diligence
is the process of assessing commercial real estate to identify possible risk of environmental contamination, either past or potential. This is important to a lender for several reasons. Environmental liabilities can decrease a property’s collateral value in a real estate loan. A borrower’s ability to repay a loan can be impacted by unforeseen costs of cleaning up contamination or complying with environmental regulations. And, if a property is foreclosed upon, the lender may find itself holding title to a contaminated property and the responsibilities that go with it. Numerous federal, state and local environmental laws affect commercial real estate. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), also commonly referred to as Superfund, established liability provisions that drive the need for environmental due diligence. The Resource Conservation and Recovery Act (RCRA), the Superfund Amendments and Reauthorization Act (SARA), and the Small Business Liability Relief and Brownfields Revitalization Act each provide additional complexity and considerations.
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The United States Environmental Protection Agency established the Standards and Practices for All Appropriate Inquiries (AAI Rule), which provides the specific regulatory requirements for conducting “all appropriate inquiries” for property acquisitions and qualifying for landowner liability protections under CERCLA. This is an important risk reduction tool. Without liability protection, landowners can be liable for the costs associated with environmental contamination and site remediation regardless of whether they were responsible for the contamination. Lenders are shielded from these potential substantial costs as long as they are careful to properly manage their activities and relationship to property management. This requires attention, especially when taking control of a foreclosed property. Limiting liability under CERCLA and other laws is the strongest driver of environmental due diligence efforts. Many people who work with commercial real estate transactions are familiar with the Phase I Environmental Site Assessment (Phase I ESA), arguably the most recognized form of environmental due diligence. By conducting a Phase I ESA, potential purchasers can satisfy the requirements for “all appropriate inquiries” and benefit from landowner liability protection under CERCLA law. Phase I ESAs are conducted in accordance with ASTM Standard E1527-13 or, less commonly, per ASTM Standard E2247-16 for Forestland or
