The Role of Environmental Assessments in Commercial Real Estate Transaction

When you are purchasing a store, restaurant, warehouse, office building, or other piece of commercial real estate, you have to clear a number of hurdles to get your loan approved and take ownership of the property. Your Annapolis lender will likely request an environmental audit as they work through the underwriting stage of your loan. It’s important to know what to expect from an audit, how it may affect your lending options, and the potential outcomes.

The Purpose of an Environmental Assessment

People who buy commercial property are required to get an environmental site assessment, thanks to the passage of the Superfund Cleanup Acceleration Act of 1998. An environmental audit is meant to uncover contaminants that could make the property dangerous for visitors or employees. Lenders do not want to fund the purchase of a property that is inherently dangerous and likely to lead to default, and buyers don’t want the stress and lost money that comes with a contaminated property.

An environmental site assessment should identify any potential contaminants that could affect people’s health, including lead-based paint, radon, petroleum products, and hazardous substances. It may also find groundwater contamination, soil contamination, black mold, and asbestos.

Who Benefits from an Environmental Assessment?

Everyone involved in the purchase and sale of a commercial property in Annapolis can benefit from a comprehensive environmental assessment. Buyers ensure that they are not putting their life savings toward the purchase of a property that is fundamentally unsafe, and this type of assessment also gives them power during negotiations. 

Sellers can also benefit from environmental assessments—should issues with environmental contaminants arise down the line, they may be exposed to real estate litigation. An assessment before the sale goes through ensures that any issues that do come up later on are the fault and responsibility of the buyer.

Of course, insurance companies and lenders stand to benefit from environmental audits. Insurance companies can provide more targeted coverage based on the risks that are present on a specific piece of property or choose to deny coverage entirely. This limits their exposure to financial losses. 

Lenders can also avoid catastrophe when environmental audits uncover deadly contaminants that render a site too dangerous to build on or use. Without an audit, dangerous contaminants may not become apparent for years or even decades. When this happens, it’s common for the buyer to default on the property because they must evacuate it.

Types of Environmental Audits

Several types of environmental audits may be used in commercial real estate transactions, including:

  • Phase I. A Phase I assessment is the most common type of environmental site assessment, utilizing the property’s historical records, information gathered from previous owners, and a physical inspection of the site itself. Its goal is to find potential environmental issues that warrant further investigation.
  • Phase II. If a Phase I assessment finds potential issues, a Phase II assessment is ordered. This type of assessment is more in-depth, involving the sampling of potential contaminants and testing of hazardous materials.
  • Phase III. When a Phase II assessment finds contamination, a Phase III assessment is used to discover the extent of contamination and develop plans for remediation.

There are other types of environmental audits for specialized situations, including Limited Phase I assessments and various types of Phase I assessments used for different types of loans.

Outside of the regulated environmental site assessments, there are other types of environmental audits, assessments, and screenings regulated by different industry associations.

Timeline of an Environmental Audit

In the initial stages of a commercial loan or purchase agreement, the due diligence period allows a buyer to look for any potential issues that may threaten the sale of the property. It is generally early in this process that the buyer sets up an environmental audit, both to protect their own investment and to meet the conditions of their commercial loan. The Phase I ESA is next and may take a substantial amount of time since it involves both a physical site visit and background research.

If the Phase I ESA does not uncover any risks, that may be the end of the line for you. But if you require a Phase II and then a Phase III ESA, your purchase could be delayed while you wait to find out the extent of the damage.

When you purchase commercial real estate in Annapolis, you must protect yourself from dangers that could threaten the property’s value. An environmental assessment is one tool that you can use before closing on your purchase.