Developing a "team" approach to environmental due diligence can benefit you in today's economy

As real estate investors and lenders navigate through the current economic conditions, most agree that real estate which has always been a good investment will eventually return to the glory days many have counted on for generations. If history is any indicator (and it usually is), those who buy on this side of the cycle are poised to do well over the next decade. Many who have been on the side line are now putting their capital to work purchasing properties or bank owned real estate at reduced prices. Developing a "team" approach can have many benefits including fast mobilization. If you have established a relationship with a consulting firm, many times you can lean on that relationship to move things quicker. The first step typically is to order the phase one Environmental Site Assessment (ESA). Within a few days of the site inspection, you should be able to have some discussions on the findings. If a Recognized Environmental Condition (REC) exists, some additional investigation (phase II) may be warranted. Many providers of phase one ESA reports conduct phase II investigations in house, while others will work with outside firms that provide those services. The field work, laboratory analysis and final report will take additional time (approximately 1-2 weeks) so the sooner this process begins the better for obtaining data quickly. Upon completion, you will have more data to understand the environmental component to the asset being purchased. The additional investigation may determine that no impacts have occurred in the Areas of Concern (AOC) which is the best outcome. The other outcome, is that subsurface (soil/groundwater) impacts exist that will need to be addressed. Many impacts can be quantified with the additional data provided from the phase II investigation. The third component in having a "team" approach is an environmental attorney. Understanding the Federal, State and local environmental laws is crucial to making decisions on how to proceed. Treating groundwater vs. monitoring groundwater can depend on the scope of work presented as well as the regulatory interpretation of the data. An experienced attorney will be well versed in the regulatory notification requirements and better able to advise clients since non-notification can carry monetary penalties. If there are environmental impacts to address, the buyer and seller should discuss the situation so an amicable resolution can be found. Attorneys can be a good resource during these negotiations. The lending community has also gained a better understanding of the environmental component of due diligence since its inception. Recommendations to test underground storage tanks and sample on-site sanitary structures have provided lenders the comfort of having more data prior to making a loan. As lenders become defacto sellers from a foreclosure proceeding, the lack of this data can compound the problem of selling a non-performing loan. The more information a bank has when originating a new loan will speed up the closing process. Waiting for the bank to order the phase one, review the report, discuss the findings with the borrower and then possibly order a phase II investigation can be a longer than anticipated process. Working towards the closing of a commercial real estate transaction with a "team" approach can increase the speed in which the phases required are conducted. This can lead to a better understanding of any impacts as well as the remedial costs required and the time frame to complete. The legal component can aid the buyer in understanding the environmental laws and regulatory agency requirements and notification. The "team" approach can also assist a lending institution in understanding the dynamics of the environmental conditions and provide valuable data when considering the loan. Having an environmental impact on a property may not be the worst thing in the world. Not understanding the impact and potential cost to cure may. Chuck Merritt is a LEED AP and the president of Merritt Environmental Consulting Corp., Hauppauge, N.Y.