5 Reasons Environmental Due Diligence Is Worthwhile
Super Bowl LI drew the nation's attention to Houston, and CRE professionals to its development opportunities. The visibility afforded by the event merged with positive economic indicators to help catalyze a new wave of investment, after the price of oil fell to its low-water mark in 2014 and caused Houston's gross domestic product contribution to shrink the subsequent year.
According to Seeking Alpha contributor Chilton REIT Team, Houston's brief slump prompted new players to enter the market at its bottom in 2015 to take advantage of low prices. A year later, the performance of Houston-exposed REITs exceeded their benchmarks by 900 basis points. As Houston's economy continues to grow and its market activity increases, so do its CRE professionals' need for environmental due diligence.
A seller's decision to pursue environmental due diligence often is based solely on fulfilling the requirements of the lender involved in a transaction. But a number of owners and developers commission reports on their own for the valuable insights they contain and varied purposes they can serve. These are five top factors savvy decision-makers consider when performing their cost-benefit analyses to determine whether to retain an environmental professional.
1. More Complete Property Value Assessment
Due diligence assessments conducted by qualified environmental professionals can identify environmental liabilities associated with the current and historical uses of the subject property and those nearby that could adversely affect it. This is particularly important in densely populated, well-developed areas. These liabilities can be quantified in a forecast financial value. The projections can play an important role in the transaction negotiation process by providing a more informed property valuation.
2. Early Identification Of Issues
Some property types, like industrial and life science buildings, warrant careful monitoring and more frequent assessment. These higher-risk property assets often contain sophisticated systems and sensitive instruments, making them more vulnerable to undetected site conditions. They should be considered for an Environmental Site Assessment.
3. Mitigating Risk And Increasing Transactional Fluidity
Risk is inherent in any real estate transaction. Retaining an environmental professional to conduct environmental due diligence gives parties a complete picture of environmental liabilities so they can determine a course of action and assign responsibility. This facilitates and accelerates the transaction process, making negotiations less arduous.
Contaminated sites represent a serious liability for landowners. The Superfund Law renders liability retroactive (even for issues before the law’s implementation in 1980), joint (any potentially responsible party may be held accountable) and strict. Engaging a team to conduct environmental due diligence significantly reduces the likelihood of an unforeseen lawsuit. Commissioning a report before purchasing can be a good negotiating tool. It can force sellers to fix issues or at least share the cost.
4. Operational Success
Conducting thorough environmental due diligence can identify potential environmental impairments to a property. These could impede operation of on-site businesses and negatively affect tenants' experience and retention. Asbestos-containing materials, mold and migration of hazardous chemicals like dry cleaner chemicals or petroleum via the indoor air pathway are examples of dangerous conditions that can manifest.
5. Property Development
Investors evaluating properties for equity acquisition should consider equity-level environmental due diligence. While this has become a standard component of real estate transactions, a higher degree of risk awareness may be warranted for properties that will undergo soil excavation or grading for site development.
Prospective buyers may also want to consider equity-level property condition assessment due diligence. This affords a comprehensive overview of the state of a property's facades, structures and systems. Necessary immediate repairs can be surprising and costly, but reports give capital expenditure recommendations that serve as a path for prudent allocation of repair dollars. The cost of these services is minimal compared to the headaches and long-term operational costs incurred by neglecting them.
To learn more about Bisnow content sponsor EBI Consulting and how it can help with due diligence, click here.