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Environmental Due Diligence: Lessons from the Trenches

May 16, 2019

PM Environmental’s due diligence team shares the advice they give most often, and the consequences of not heeding that advice.

Environmental due diligence refers to the steps taken to document and quantify a property’s potential contamination risk. Its centerpiece is the Phase I Environmental Site Assessment (ESA), an independent professional report about the environmental condition of a property that documents any preexisting contamination. 

Prior to purchasing a commercial property, buyers have a one-time window of opportunity to claim innocent landowner protections by completing a Phase I ESA, avoiding liability for cleanups or closures that could result from preexisting environmental issues.  

“Due diligence has clear benefits for property owners, but the temptation is always there to try to skip a step, take a shortcut or even avoid the process altogether,” said Kristin Gable, National Manager of Due Diligence at PM Environmental. “While there are no shortcuts to reliable due diligence, PM has the experience to make the process as efficient and painless as possible.” 

Here, Gable and PM’s Regional Due Diligence Managers, Carey Kratz, Jackie Schafer and Amanda Stone condense their 50-plus years of combined experience into a few pieces of sound advice:  

Think of due diligence as the cheapest insurance policy you’ll ever buy.

“No investor is thrilled to spend time and money on a Phase I ESA,” Gable admitted. “But without the innocent landowner protection it provides, the potential cost and delays to clean up pre-existing contamination are far greater than what is spent on due diligence.”

Due diligence can even save a developer from making a bad investment. “PM is sometimes brought in early to evaluate a property,” she explained. “We can flag environmental issues that would keep a site from qualifying for SBA (Small Business Administration) loans or tax credits. Knowing that, a developer might choose to pass on an opportunity.” 

Plan ahead and start the process early.

How long does due diligence take? The timeline varies based on the type of project. For a standard commercially funded transaction, completing a Phase I ESA might take just three to five weeks. For more extensive redevelopments involving federal or state funding support, the timeline can be much longer. 

Carey Kratz’s Southeast Michigan territory includes Detroit. She frequently works with clients purchasing blighted or abandoned properties to repurpose them into senior or low-income housing. “Most clients and lenders undertaking projects like these understand that the due diligence process will be more extensive,” Kratz said. “Redevelopments that involve funding or tax credits from HUD (U.S. Housing and Urban Development) or MSHDA (Michigan State Housing Development Authority) require going beyond a traditional Phase I ESA to document existing contaminants like asbestos and lead paint. Compliance can take several years.”

As the team stresses, any project, regardless of scope, becomes more challenging when a client neglects to build enough time into the schedule for due diligence. 

Each project is unique. But that doesn’t mean you have to reinvent the wheel.

A Phase I ESA is developed according to standards sent by the American Society for Testing and Materials (ASTM). While it’s a uniform process, each property will have a different result. “A Phase I ESA that uncovers no environmental concerns at one office building site with no significant environmental issues does not mean that future office developments will go as smoothly,” cautioned Gable. 

While a Phase I ESA includes a site visit, most of the legwork of due diligence involves reviewing historic land use information maintained by various public entities. Fortunately, PM’s experience means research doesn’t have to start from scratch every time. “PM’s research department is a real advantage for customers,” added Jackie Schafer, who covers Michigan’s central, northern and western counties as well as parts of the central and western U.S. Schafer began her career in PM’s research department. “We know which public data sources are the most reliable,” she said, “as well as which might take the most time to access. For example, past experience with a particular fire department might confirm that their records are excellent, but they require several weeks to process requests.” 

“We’ve also been collecting our own historical data on properties for twenty years,” said Gable. “Our database often includes information on nearby properties that provides an important starting point. We supplement that information with services like Environmental Data Resources (EDR), the most comprehensive provider of land use and environmental risk data in the U.S.”

Just because you’re not building on the land doesn’t mean you don’t need due diligence.

Amanda Stone’s region includes Mississippi, Alabama, Georgia, North Carolina, South Carolina, Virginia, Kentucky and Tennessee. Like her PM colleagues, Stone has worked with clients who purchase property as an investment, with no specific development plans. She cited a recent case when an individual acquired a property without completing a Phase I ESA. “We were brought in two years later when he went to sell the parcel,” she explained. “We discovered that the property had been home to a bulk oil storage and distribution facility. By the time we identified the contamination, he was already in the chain of ownership, and liable.”

In many rural areas of Stone’s region, the focus is not on developing property, but on conserving it. “I’ve worked with several nature conservancies and non-profits that acquire parcels – either at a reduced cost or via donation – with the intent to protect them from future development,” she said. “Due diligence is every bit as important in these cases, to make sure someone isn’t unloading land just to offload the responsibility for contamination clean-up.” 

Partner with an expert.

The PM team agrees that when it comes to due diligence, the right environmental consultant can make all the difference. “Before joining PM, I worked for another environmental consultant,” said Stone. “I’ve seen firsthand how PM goes above and beyond to provide more information than the standard requires. We help customers make wise decisions today and anticipate challenges they might encounter in the future.”

“There’s no substitute for experience,” added Gable. “At PM, we emphasize training and retaining staff, not relying on subcontractors. Our focus is on leveraging our expertise for our clients, while we develop the next generation of environmental experts.”