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Environmental Due Diligence for Property Refinancing

Environmental Due Diligence for Property Refinancing

With interest rates as low as they currently are, a lot of commercial property owners are refinancing. Depending on the property history, many lenders are going to require some environmental due diligence as part of the process. You likely did a Phase I Environmental Site Assessment (Phase I) when you originally purchased the property or perhaps one was not done because the property was purchased before Phase I’s became common, you inherited it, or you originally bought it in cash. You probably feel like you don’t want to dig up something from the past and just want to get your refinancing accomplished and allow the bank to “check a box”. But performing due diligence is a way to manage your risk and protect yourself from liability or unexpected costs down the road. We can help you get through the environmental due diligence process quickly and easily.

Agree to a Scope of Work

Discuss with your environmental professional what your goals are, and what requirements your lender may have. To qualify for federal Comprehensive Environmental Response Compensation and Liability Act (CERCLA) liability protections, you would want an ASTM E15272-13 Phase I Environmental Site Assessment, which means a records review, a site visit, interviews and a report.

Due diligence can also be pared down with a Transaction Screen. Transaction Screens (ASTM E1528-14) are typically faster and less costly because they do not provide the depth of inquiry, or liability protection, that a Phase I ESA does. Some lenders require Transaction Screens for properties below a certain value and with a well-documented history of no environmental risk.

Phase I investigations typically do not include surveys for lead paint, asbestos, or radon. Nor do they include testing of groundwater or soil. If these are services you are interested in, make sure to bring it up during the hiring phase so that your professional can scope and meet your needs.

Discuss Your Timeline

Mention to your environmental professional what sort of timeline you are working on. Does your property closing have a window of due diligence? When does it end? Phase Is usually require a minimum of 20 days to gather all reasonably ascertainable information. For example, some municipal offices account for 10 business days to properly respond to a public records request. During the COVID-19 pandemic municipal offices may be slower to respond than normal, so get your environmental professional involved early! As of the publishing of this article most town offices are still performing essential services and we will work with them to obtain the necessary information to complete your report to the bank’s satisfaction. If you are in a rush, we can usually accommodate, but be sure to let your professional know at the beginning of the process!

Expect to be Interviewed

Part of the procedure is asking the user, this is the client (ie. you!), for his or her knowledge. Ideally the environmental professional would talk to you in person or through a phone discussion. At a minimum it requires you to fill out a short questionnaire. Some of the questions you will see or hear include:

Do you have any knowledge of past site uses? Has anyone mentioned a release or a previous report?

You do not have to have knowledge for every question, but to be eligible for landowner liability protection you must give a response to all questions. This interview is not intended to cast you as an environmental suspect, but to satisfy the search for information in all avenues of inquiry.

If the report is to conform with the ASTM E15272-13 Phase I ESA, the professional is also obliged to make the effort to interview past and present owners and occupants of the site.

The Site Visit

Your environmental professional will need to visit the site and enter any structures on the property. While your presence is not mandatory, your presence is usually welcome to help explain the unique characteristics of a property and you probably know it best. If you are unable to attend in person, we can set up a video chat to allow you to provide real-time feedback while we are at the property, or we can always talk after our site visit.

The Report

After the interviews, records review and site visit, you will be presented with a report that includes several appendices of backup resources which your environmental professional used to draw conclusions. The report itself will describe the property, specify all the research and work your environmental professional performed, determine if there are any Recognized Environmental Conditions (RECs) and give the environmental professional’s opinions. For ease of review, Cooperstown will summarize all conclusions at the beginning of the report in an Executive Summary. This section will identify any RECs, and, if applicable, give recommendations for additional investigations (Phase II). Additional investigations are recommended to determine, in the case of a risk of contamination, if hazardous substances or petroleum products actually exist on the property or, in the case of known contamination, to learn the current status of the site’s contamination.

Decide What You Want to Do

As the user of the report, it is now up to you to decide what you want to do with the information in the report. Consider your goals for the property and your comfort, and possibly your lender’s comfort with risk.

Perhaps your property had no RECs discovered and your refinance will be able to move forward with no problems! Congratulations!

Perhaps some RECs were discovered, and we recommended additional investigations be performed. Discuss the findings with your environmental professional to determine if the additional investigations are necessary for your purposes. Knowing the environmental risks associated with your property up front put you in the best possible position to mitigate risk and potential liability. If you do decide to perform recommended additional investigations, we have the resources and expertise to guide you through the steps of that process as we design and execute environmental testing and investigations within your due diligence period.

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