What is Environmental Due Diligence?
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Everything Land Developers need to know about Environmental Due Diligence.
Environmental Due Diligence Definition
Environmental Due Diligence is the process that evaluates the environmental conditions and risks associated with a property. The process can be at the request of land developers, lenders, attorneys, or private owners who intend to purchase, refinance, or occupy a property.
Environmental Due Diligence can include reviews of:
- Proximity to sensitive habitats
- Historical structure and materials
- Safe disposal of hazardous materials
- Operational procedures
- Potential soil and groundwater contamination
Why is Environmental Due Diligence Important?
Environmental due diligence is a form of proactive environmental risk management. It is an essential liability protection measure to reduce risks and prevent unnecessary expenditure by accessing the potential environmental liabilities. Unfortunately, many projects fail or have their development stunted by lawsuits, fines, and ecological remediation without a proper environmental due diligence process. Without due diligence, you may not know what environmental liability you could potentially own.
What Type of Environmental Liability Could a Land Developer Have?
When contamination is found on a land developer's property without a Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) protection, the landowner becomes responsible for the cleanup. A landowner is also potentially liable for nearby properties where contamination has migrated. Additionally, contamination, where the waste from the land developer's property is sent for treatment or disposal, becomes the responsibility of the land developer too!
If bodily injury, wrongful death, medical monitoring, or property damage claims arise due to a recognized environmental condition or exposure, a land developer becomes responsible for tort liability. Tort liability can lead to costly civil or criminal trials and appeals.
Fines and penalties may be enforced for noncompliance, violations of environmental legislation, permits or approvals, and expenses for projects agreed to as part of a settlement for noncompliance. Land developers who do not comply with applicable laws and regulations that protect the environment may be required to pay civil or criminal fines and penalties. The range for fines and penalties can range from moderate amounts to millions of dollars per violation.
What Kinds of Environmental Due Diligence Are There?
A wetland determination indicates areas subject to wetland conservation provisions, and if present, identifies the location of each. This process involves an on-site investigation and assessment of the property, from soil conditions to vegetation and wildlife. If the wetland determination report identifies wetland conditions that do exist, a wetland delineation is required. A wetland delineation maps out the entire wetland area on the property for regulatory authorities.
If a wetland is identified on a property, part of the delineation process is submitting a report to the U.S Army of Corps of Engineers (USACE). The USACE determines whether the wetland area is jurisdictional and in need of protection or not jurisdictional and able to be constructed upon. Since jurisdictional wetlands are regulated by Section 404 of the Clean Water Act, proposed construction projects with jurisdictional wetlands must obtain a permit from the USACE.
A habitat assessment is the evaluation of the biological and water resource features of a property. Conducting a habitat assessment is recommended before developing any detailed design or drawings for a project. A habitat assessment helps land developers design the development project to minimize and mitigate potential impacts on critical sensitive areas. Armed with this information, a developer can avoid costly reworking of the project's design and streamline the environmental compliance review.
The essential components of a habitat assessment report are:
- Executive Summary - A summary of the property, the features of conservation concern, the proposed project, and potential impacts on biological and water resources
- General Site Description - Describes the general characteristics of the site like topography, soils, vegetation cover types, etc.
- Habitats or Ecological Communities - Describes the habitats or ecological communities on or near a site.
- Map - A site map that illustrates habitats, watercourses, existing developed features, and proposed new features.
- Species of Conservation Concern - Lists and discusses the plants and animals of conservation concern present on a site and may be affected by the proposed project.
- Potential Impacts - Describes the proposed development project and assesses the potential impacts on biological and water resources.
- Potential Mitigation - Discusses the preliminary site design, engineering, infrastructure features, or other measures that could be employed to mitigate any adverse effects of the proposed project on biological or water resources.
The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) establishes the process that determines who is liable for any hazardous substances or hazardous material on a property and aims to clean up contaminated sites and prevent contamination of future sites by assigning liability to parties involved. Enforced by the EPA, CERCLA gives the federal government the ability to respond to releases or threatened releases of hazardous substances and pursue polluters to clean up contaminated sites.
If contamination is found on a property, the law authorizes two kinds of response actions under CERCLA:
- Short-term Removal or Emergency Response Actions - Actions that immediately decrease, prevent, minimize, stabilize, mitigate, or eliminate a release or threatened release that may pose a threat to public health or the welfare of the environment.
- Long-term Remedial Actions - Actions that can only be conducted at sites listed on the U.S. EPA's National Priority List (NPL). These actions significantly reduce the dangers of releasing hazardous substances that are serious but aren't immediately life-threatening. Long-term remedial measures provide more permanent solutions to hazardous substance threats and involve more extensive studies and action periods.
For long-term remedies, CERCLA requirements are extensive, but the following sequence of events generally applies for a property:
- Preliminary assessment
- Site investigation
- Listing on the National Priorities List
- Remedial investigation
- Feasibility study
- Record of decision
- Remedial design
- Remedial action
- Long-term operation
Phase I Environmental Site Assessment
A Phase I Environmental Site Assessment (ESA) is a tool to determine whether a property's current or historical use has contaminated the soil or groundwater in a way that would damage the environment or create a health risk.
The information gathered in a Phase I ESA is used to develop an independent professional opinion about the environmental issues and condition of a property. It also helps to identify actual or potential environmental contamination and determine if an additional investigation or testing is warranted. All of which can impact a property's value or affect an "innocent landowner" exemption claim following an acquisition.
A Phase I ESA typically includes the following:
- A site visit and inspection to observe current conditions and uses of the property and adjacent properties
- A review of the property's past conditions via historical records
- A review of federal, state, tribal, and local regulatory databases
- A review of state and local agency records
- Interviews with current and past property owners, operators, occupants, or others familiar with the property.
- Interviews with the Phase I ESA user for title or judicial records for environmental liens and activity and use limitations (AULs); specialized knowledge or experience; actual knowledge; commonly known or reasonably ascertainable information; and the reason for the preparation of the Phase I ESA.
Phase II Environmental Site Assessment
A Phase II ESA is used to evaluate the presence or absence of petroleum products or hazardous substances in the subsurface of a site. When a Phase I ESA identifies a recognized environmental condition or the potential for impacts to the subsurface at a site, most land developers and other project stakeholders request to evaluate the potential effects by performing Phase II Environmental testing.
When designing the scope of a Phase II ESA, the most critical pieces of information necessary to include are:
- Areas of Concern
- Chemicals of Concern
- Local geology
- Site access issues
The American Society of Testing and Materials (ASTM) provides a standard guide to ensure Phase II Environmental Testing complies with federal and state regulations. Depending on what is discovered in the initial Phase I ESA, a Phase II ESA may require any of the following investigations to test for a variety of contaminants on a site:
- Surface soil sampling
- Surface water sampling
- Soil vapor sampling
- Subsurface soil boring
- Groundwater monitoring well installation
- Underground storage tank (UST) testing
- Geophysical testing for drums or tanks buried underground
- Sampling contents of drums left on a site
- Sampling transformers/capacitors for polychlorinated biphenyls
- Evaluations of chemical fate and transport
- Risk assessment and modeling
There are circumstances when a land developer may not want to invest in a complete Phase II ESA. They may then opt for a limited Phase II sampling which confirms the presence of a pollutant and may be limited by the locations sampled, the number of samples, media type sampled, or a combination.
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What Types of Reports Help with Environmental Due Diligence?
An environmental questionnaire is a preliminary report used by lenders to screen the ecological hazards of a property undergoing a transaction for the pre-loan qualification process. This questionnaire consolidates the known facts of a property upfront as a basic level of contamination and health risk presumption. If an environmental questionnaire presents a possibility of contamination, a more in-depth environmental due diligence report should be ordered for even greater risk management.
Desktop Environmental Report
A Desktop Environmental Report is a limited-scope environmental assessment that does not include a visit by an environmental consultant to the subject property. Due to its limited scope, the desktop environmental report is often used as a cost-effective initial screen of a property to determine the liability potential of the site.
The scope of a desktop environmental report will likely be customized depending on the needs of a land developer but generally include one or more of the following components:
- Environmental Records and Database Review - This report reviews state and federal environmental databases for information on property contamination and other environmental issues that have been reported to state and federal agencies.
- Historical Records and Database Review - This includes a review of historical records, like aerial photographs, historical topographic maps, fire insurance maps, and city directories, with an opinion regarding the environmental risk of a property.
- Records Search with Risk Assessment - This is similar to the Historical Records and Database Review and is one of the reports required by the Small Business Administration's (SBA) environmental policy for SBA lenders.
- And custom items of interest to the client.
Environmental Transaction Screen
An Environmental Transaction Screen (ETS) is a screening tool intended to identify potential environmental concerns for those who wish to conduct limited environmental due diligence.
An Environmental Transaction Screen assessment can serve as an alternative approach to a Phase 1 Environmental Site Assessment. However, they are usually only recommended for low-risk property types that already have historical information available.
An Environmental Transaction Screen includes the following:
- A site visit
- Regulatory records review
- Key personnel interviews
- Limited historical research
A feasibility study, or feasibility analysis, collects current and historical data about a property and its surroundings. It analyzes the data to determine what types of developments are feasible for the property and future requirements for the entire approval process. Commercial real estate firms and lenders typically use a feasibility analysis.
A feasibility study includes the following:
- Basic site information
- Utility infrastructure
- Physical site information
- Site conceptual layout
- Permitting information for all jurisdictions
- Construction cost estimate, impact, and permitting fees
Should Land Developers Perform Due Diligence Before They Buy Land?
Yes, land developers should perform environmental due diligence before considering buying land to understand any potential environmental concern. Initiating the environmental due diligence as early as possible will provide enough time to conduct any necessary steps to eliminate potential problems and liabilities. Proper environmental due diligence and environmental risk management help reduce the chances of grave financial and legal risk and a project falling behind schedule.
Who Performs Environmental Due Diligence?
Whether you are a renewable energy land developer, an oil and gas project planner, or are working in commercial real estate, you will likely need the help of an environmental professional to perform proper due diligence. There are also new tools in the marketplace that help with regulatory compliance and explain ecological provisions.
Environmental due diligence work is typically outsourced to environmental consultants. Environmental consultants combine scientific knowledge, their understanding of regulatory requirements, and expertise to identify and minimize risks that would result in legal action or fines and ensure compliance with current laws. By performing desk-based research and fieldwork, environmental consultants provide clients with detailed reports on their findings and recommendations for their clients' land developments.
Depending on the size, history, location of a property for land development, and the service needed, the cost of environmental consultants will vary. These costs can range anywhere between $1,000 to $10,000+.
For land developers who want to protect their projects from environmental and cultural influences that could impede a project and its profitability down the line, there are software-as-a-service (SAAS) solutions. Environmental due diligence software platforms, like Transect, generate on-demand reports that reveal risks from threatened and endangered species, jurisdictional waterways and wetlands, protected areas, flood hazards, and more within minutes. In addition, these solutions help identify the need for additional field studies such as wetlands delineations, protected species habitat assessments, or cultural resources studies before hiring a consultant, which helps save significant amounts of time and money.