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Experts Speak

What is Environmental Due Diligence?

The real estate industry is a lot more complex than most people might think. To those not conversant with the industry and all that’s obtainable, real estate is simply summed up as buying, selling, or leasing property. Now, while this isn’t far from the truth, there are many nuanced processes that are involved in real estate transactions. 

These processes become a lot more important when dealing with commercial real estate purchases. For instance, environmental due diligence is a very important step that must be taken when you’re looking to sell, purchase, lease, or even refinance a piece of commercial real estate. This is because there are environmental liabilities that most people don’t know about, and these could easily run into millions of dollars in some cases. When going into any commercial real estate transaction, environmental due diligence is compulsory if you want to manage risk and avoid any liabilities. 

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What is Environmental Due Diligence (EDD)?

EDD is the formal process of assessing real estate for potential risk of environmental contamination, such as groundwater and soil contamination. This process can take several forms and be accomplished through various methods. However, their primary objective is to establish that an organization is compliant with environmental regulations. 

The Environmental Protection Agency (EPA) is responsible for setting the standards for conducting EDD. Professionals in the field determine the type of assessment warranted and the extent to which it should be implemented. This varies based on the property. Click here to learn more about the Environmental Protection Agency. 

An EDD report can include reviews of:

  • Potential soil and groundwater contamination
  • Historical structure and materials
  • Operational procedures
  • Proximity to sensitive habitats
  • Safe disposal of hazardous materials. 

Types of Environmental Liabilities

There are several environmental liabilities, and they vary depending on their source. Usually, they are associated with federal, state, or local laws, and each level of government has public agencies that enforce them. The following are some of the most common ones: 

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Remediation Obligations

Under remediation obligations, businesses are required to manage the effects of pollution or industrial activities that pose a threat to the environment and human health. These obligations may include excavations, relocating communities to safer areas, water treatment, monitoring, re-constructing damaged properties, and evaluating the surroundings for adverse effects. 

Compensation Obligations

Compensation obligations require a firm to pay compensation for damages caused to individuals and their property, usually through the release of toxic substances into the environment. It can be classified as property damage, economic loss, or personal injury. 

It is important to note that a company can face compensation obligations even after complying with other environmental obligations. These compensations include a variety of damages including pain, bodily harm, wrongful death, loss of livestock and farm crops, loss of source of livelihood, loss of equipment, and lost profits. 

Compliance Obligations

These are the set of regulations that govern the manufacture, use, and disposal of chemicals and other toxic substances in the environment. It is important that companies looking to purchase a piece of real estate to be used in manufacturing goods consider existing regulations. 

To ensure compliance, a business may incur certain costs, such as administrative costs that cover operations like training staff that handle chemical substances. Administrative costs also cover such things as labeling chemicals and recording processes. 

These businesses also set aside a budget to handle waste treatment, manage chemical spills as well as the harmful effects of toxic air emissions, and the cost of closing a disposal site. Negligence of any of the above-mentioned processes will attract serious legal actions by the government against such a business. Visit https://emergency.fsu.edu/  to learn more about chemical spills. 

Fines

A business that fails to comply with the laws and regulations put in place to protect the environment from degradation and pollution may be required to pay fines and penalties. How much the entity pays as the fine or penalty is determined by an approved agency after assessing the extent and effect of the non-compliance on the environment and individuals within or around the area. 

Usually, the amount paid by the entity is made to equal how much they saved through the non-compliance. This amount can vary from as little as a few thousand dollars to as much as several million. 

Final Thoughts

Anyone looking to purchase a property can benefit from EDD even if the purchase is not being financed by the bank or a lending institution. We had to mention this because banks and other lending institutions often require EDD to ensure the property being obtained is free from any environmental contaminations. 

EDD reduces the chances of purchasing or leasing a piece of real estate that’s already been contaminated by the previous owners. Also, in the event that related issues arise in the future, the EDD report can be used as a legal defense.

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by Sushree Swagatika

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