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Often, CRE professionals' decision to pursue environmental due diligence is based solely on fulfilling the requirements of the lender involved in a transaction. However, 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 careful cost-benefit analyses to determine whether to retain an environmental professional.
1. More Complete Property Value Assessment
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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
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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. They are thus more vulnerable to undetected site conditions and should thus 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 for addressing. 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 (anyone 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. If one commissions a report before purchasing, it can be a good negotiating tool and force the current owners to fix issues themselves 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' cash flows. 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 take place.
5. Property Development
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Investors evaluating properties for equity acquisition should consider equity-level environmental due diligence. Necessary, immediate repairs can be surprising and costly. Reports give capital expenditure recommendations that serve as a path for prudent allocation of repair dollars.
Proper environmental due diligence has become a standard component of real estate transactions. 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 they can help with environmental due diligence, click here.
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