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How does Environmental Due Diligence help Buyers?

How does Environmental Due Diligence help Buyers?

In addition to being protected from financial liabilities, environmental due diligence can be a useful tool for buyers wanting to get the best investment value for a property. Knowing environmental risks at a property prior to purchasing can be used to the buyer’s advantage in negotiations, while not understanding environmental risks can be costly later. For example, if a recognized environmental condition is determined to be present at the property, the buyer may ask for some type of concession on the purchase. The concession may include a price reduction, mitigation of the condition, or escrowing of funds to address the condition after purchase. The following are a couple situations that Hanis Consulting has encountered while helping buyers of commercial/industrial properties.

Off-Site Contamination.

The buyer purchased a large commercial property with the potential for off-site contamination to impact the ambient air in the building. The buyer negotiated with the seller to escrow funds for the investigation and, if necessary, mitigation measures to protect workers, for the potential contamination. Had the environmental due diligence not been performed, there was a possibility of a worker becoming ill and the buyer being liable for the illness. In this case, the seller was responsible for all the related costs after closing of the transaction.

Contaminated Soils.

After completing a Phase I Environmental Site Assessment, which contained results that pointed to a potential issue with the Property, a Phase II Limited Site Investigation was performed. The investigation confirmed contaminated soils in a localized area of the property. The lenders required that the impacted soils be remediated prior to releasing funds for purchase. The buyer used this to negotiate a reduction in purchase price equal to the remediation costs. Additionally, the buyer paid the remediation expenses to retain control of the remediation of the site and therefore had invoices to show the amount expended for remediation.

Thorough Environmental Due Diligence gives the buyer negotiating power in many cases.

The number of examples are endless and depend on the complexity of the issues. In certain situations, the purchase of environmental liability insurance or environmental liability transfer may be viable options. However, there are costs associated with these remedies and who needs to pay those costs should be brought up early in the negotiation process.

Environmental due diligence can also help the prospective buyer better understand how they can appropriately develop a property even with environmental issues present.

In some cases, the property may have been previously contaminated and cleaned up to the satisfaction of the government. However, with risk-based cleanup programs, certain restrictions may have been placed on the property that may affect future use. An example of a restriction would be the maintenance of an engineered barrier, such as a parking lot. In this case, the parking lot could not be torn up and turned into green-space without additional remediation. Using environmental due diligence in your purchasing process only helps lenders feel confident in their investment in you, and you understand the complexities of your property so you can utilize it to its fullest potential.