Redevelopment projects have many aspects that can be both complicated and risky. Lenders are often required or, at the very least, compelled to limit their risk by requiring their borrowers to perform in-depth due diligence before getting involved with commercial property transactions that may have contamination issues. Lenders are concerned that contamination could lead to unexpected regulatory involvement that could jeopardize the repayment of a loan. Developers are concerned that contamination will limit the future reuse and redevelopment plans for the property. Creating and implementing an environmental risk management policy in conjunction with a knowledgeable expert can be the key to ensuring that all parties involved are fully transparent, completely compliant, and ensure project risk is reduced on all sides.
Understanding the Key Components of Redevelopment Project Risk & Due Diligence:
Create an environmental risk management policy – The main purpose of an environmental risk management policy is to ensure that the extent of the risk involved in a redevelopment project is fully understood by the lender, as well as ensuring that proper due diligence practices are conducted by the borrower/developer to reduce future environmental liability and ensuring the loan is able to be repaid.
It is worth noting that the lender is exempt from regulatory environmental liability associated with a commercial property for which they provide financing. The borrowers are not. Some overlap exists between the redevelopment project risk faced by borrowers and those faced by lenders. For example, financial burdens for both parties may result from contamination cleanup, fines or penalties, and project delays caused by environmental issues.
Perform a Site Assessment – An initial Phase I Environmental Site Assessment (ESA) is part of the redevelopment project risk due diligence process and is performed to identify recognized environmental conditions (RECs) that may have potentially caused contamination at the subject property. It should be performed in accordance with the ASTM E1527-13 standard and meet the requirements of the All Appropriate Inquiries (AAI) regulation at 40 CFR Part 312. Performing a Phase I ESA is one of eight criteria needed to qualify for future environmental liability defenses (i.e. bona fide prospective purchaser (BFPP), innocent landowner or contiguous property owner) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).
The additional seven criteria that must be met to comply with the BFPP include:
- All disposal of hazardous substances occurred before acquiring the property;
- All legally required notices were provided regarding discovery or release of any hazardous substances at the property;
- Reasonable steps were taken to prevent any continuing or future release and exposure to previously released substances;
- Provided full cooperation with any response actions;
- Complied with land use restrictions;
- Complied with requests for information; and
- Confirmed no affiliation with any potentially responsible party.
Identification of RECs – For the risk-averse, this can be where the process stops. However, if there is sufficient value in the financing of the planned purchase or redevelopment of a commercial property, then moving forward with a Phase II ESA will be necessary to reduce risk and to determine what “reasonable steps” are necessary to limit future liability . At this stage, the lender may also seek to identify existing Commercial General Liability (CGL) insurance policies held by the current property owner to assist in addressing any environmental issues identified during the Phase II ESA.
SESCO Group can help you during the entire process, including a legal review of insurance policies to determine their viability to address contamination and providing recommendations to keep the project moving while reducing risk. Our team of experts will partner with you to assess and mitigate redevelopment project risk that you may be facing.