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In Focus: Why Environmental Risk Assessment Is a Necessary Corporate Investment

2011 Directory
Property is a valuable asset for any business. When an executive acquires a property, a significant consideration involves cost implications of environmental impairment, contamination, or hazard potential. To limit liability, the first step in evaluating a property's environmental status is a Phase I Environmental Site Assessment (ESA). The ESA evaluates potential and existing hazards and helps secure Comprehensive Environmental Response Compensation Liability Act (CERCLA) "innocent landowner" and/or "bona fide prospective purchaser" protection in property transactions. In other words, the ESA helps prospective owners decide whether to proceed with a real estate transaction.

New owners of real property have a strong incentive to properly investigate potential environmental risks prior to assuming ownership. A thorough environmental investigation is necessary if there is any evidence that the property has ever been used for an industrial purpose, or if there is any suggestion that contamination exists.

Most financial lending institutions, as well as the U.S. Small Business Administration (SBA), require environmental due diligence before issuing commercial loans. Additionally, it is common due diligence practice to complete an ESA to prevent future CERCLA liability for existing contamination on the property in question, even if a commercial loan is not sought.

New landowners may be liable under several environmental laws, regardless of whether the new owner played any role in causing contamination or other environmental damage in some cases. For example, a current owner or operator of a facility or property can be liable under CERCLA as a Potentially Responsible Party (PRP), regardless of whether the owner/operator played any part in the contamination.

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The remediation liability and associated defense and administrative costs can be considerable, resulting in decreased market value of the asset, as well as the costs associated with investigation and cleanup. For example, a small dry cleaning facility with on-site operations can cause environmental damage resulting in soil and groundwater investigation and significant cleanup costs.

Environmental Insurance Considerations
Once property owners uncover potential environmental exposures, they can seek specialized environmental liability insurance to protect against these risks. Prudent risk management practices can be put in place to minimize these liabilities with help from environmental specialists familiar with regional and local environmental regulations, who can also protect companies from everyday operational exposures.

Some will purchase an environmentally-distressed property at a reduced price, perform the necessary remediation, and sell the property at full price. The ESA gives the key stakeholders in the asset purchase the opportunity to make informed decisions based on their risk tolerance, and to know whether the risk will exceed their pre-established risk appetite and return metrics.

Companies seeking to protect their bottom lines should ensure that environmental risk is managed in a coordinated fashion, and forms part of the organization's overall risk management framework.

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