Environmental Issues & Investment Real Estate

Lead paint remediation in Massachusetts.  Soil contamination in Connecticut.  Asbestos in New York.   Environmental issues are a common occurrence throughout our pipeline of multifamily and mixed-use transactions.  Among all of the factors that investment real estate buyers and sellers need to be aware of, environmental concerns have become increasingly important since the 1980s after judicial decisions related to the liability of property owners to effect property site cleanup.  Environmental issues with land or buildings can greatly reduce their value, make them difficult to finance and, if a contaminated property is purchased, the buyer may be responsible for the cost of clean-up even if the buyer did not cause or contribute to the problem.

With those factors in mind, a potential buyer’s due diligence must include asking the seller if they are aware of any recognized environmental condition (REC) on the property.  The seller may not be under any obligation to volunteer information about environmental issues, but, if asked, the seller is required to answer truthfully.  In the event that the seller does not answer truthfully and a problem is later found, the seller could be charged with fraud.  If the seller answers “yes” to the question about environmental problems, then the buyer should seek further information.  Even if the seller gives a “no” answer, there may still be problems with the property that the seller doesn’t know about.  In that case, additional precautions should be taken before the buyer purchases and assumes responsibility for the property.

Some of the possible environmental concerns that may become part of the buying and selling process include:

  • Water quality
  • Lead paint
  • Radon
  • Asbestos
  • Toxic mold
  • Soil and groundwater contamination

To ensure that none of these RECs are present, a Phase I environmental site assessment (ESA) is an absolute necessity when purchasing investment property.  The first step in the process of environmental due diligence, it addresses both the underlying land and the physical improvements to the property to determine if there is any evidence of an REC that poses the threat of environmental liability.

In their interpretation of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), the U.S. courts have held that a buyer, lessor or lender may be held responsible for the remediation of hazardous substance residues, even if a prior owner caused the contamination.   The performance of a Phase I ESA, according to the courts’ reasoning, creates a safe harbor, known as the “Innocent Landowner Defense,” for the new purchaser or his or her lenders.

The actual sampling of soil, air, groundwater and building materials is typically not conducted during a Phase I ESA.  However, if a property is considered contaminated, a more detailed Phase II ESA may be conducted, which includes chemical analysis for hazardous substances and petroleum hydrocarbons.

For today’s investment real estate clients, environmental issues are only a few of the moving parts that must be navigated in a successful transaction and to realize a suitable return on investment.  Our relationship-based approach is designed to help both property owners and buyers accomplish their investment objectives.  If you’re ready to talk strategy, we’d like to hear from you.