The Practical Real Estate Lawyer | 27

John L. Payne
Determining the type and amount of data to
gather for multiple applications is crucial; in-
tegrating it into a coherent whole is essential.
THE VALUE OF INFORMATION gathered in envi-
ronmental due diligence can be applied to future business
needs, including estimating known and potential liabili-
ties, compliance with regulatory programs, subsurface
risks, and projected remediation costs remaining, environ-
mental reserves, and portfolio downsizing or expansion at
the time of sale that could lead to facility closures and
preparation of certain assets for sale. Integrating all this
information into the due diligence efforts is essential for
supporting the downside risk of the transaction and the
future business needs of the acquired acquisition. In ad-
dition, the inclusion of an EcoValuScreen evaluation into
the due diligence process can identify operational changes
that may reduce key environmental impacts (e.g. energy
consumption, greenhouse gas emissions, waste generation
and recycling, etc.) and assist in positioning the asset for a
positive return on investment. This article will review the
environmental due diligence process, data utilization, and
application of an EcoValuScreen process. In addition,
deal-crafting and post transaction management of in-
demnities and indemnity management will be addressed
as will the impacts of the recent economy to consulting
practices and due diligence trends.
John L. Payne, P.E.,
is a principal with TRC Companies, Inc., in Cin-
cinnati, Ohio He has more than 25 years of
experience in environmental projects, with
responsibilities ranging from development of
project strategy, implementation, data review,
advisor to corporations and boards of directors,
and expert testimony. His technical expertise
includes site audits, risk analysis for mergers
and acquisition transactions, hydrogeologic
investigations, development of remedial ac-
tion alternatives, and development of RCRA
and NCP project concepts and technical ap-
proaches. Mr. Paynes primary client functions
include regulatory liaison/technical negotiator
for Consent Orders and technical work plans,
development of environmental risk manage-
ment strategies for corporate managers and
ofcers, public information meetings, litigation
technical support and expert witness services,
and contract negotiations. The author grateful-
ly acknowledges the assistance of: David Con-
tant and Daniel Weed in the preparation of this
article. Mr. Payne can be reached at jpayne@
trcsolutions.com.
Gathering Data For Environmental
Due Diligence
28 | The Practical Real Estate Lawyer January 2012
ROLES OF THE DUE DILIGENCE TEAM
The members of the due diligence team contribute
an array of perspectives and areas of expertise to
the deal. The team should be built of a group of
professionals best suited to form an objective opin-
ion of the environmental condition and compliance
status of the operations that can be put into a report
that serves as a strategic plan for post-transaction
activities. Many times, the nature of the operations
of the acquisition target (e.g. industrial, pharma-
ceutical, chemical, petrochemical, refning, con-
sumer products, data centers, commercial property,
aerospace, etc.) will determine the skills and degree
of expertise that are required to meet the needs of
the deal team. In addition, if an existing property or
portfolio is to be divested, experts with experience
in identifying and addressing regulatory defciencies
or housekeeping issues before sale are important
to have on the due diligence team.
Lenders
In many cases, the driving force behind an envi-
ronmental audit for a real estate transaction is nei-
ther the buyer nor the seller, but rather the lender.
Most banks, insurance companies and/or investors
now require the borrower to determine the envi-
ronmental risks associated with the property before
completion of the transaction. The fear of the col-
lateral having signifcantly reduced market value
due to environmental liabilities or a drain on cash
fow to fund remediation projects are strong deter-
rents to any lender. The costs associated with such
audits are typically borne by the borrower, either
outright or in the loan costs administered by the
lender. In some cases, the seller may perform the
environmental audit and then provide its fndings to
the buyers representative for review before submis-
sion to the lender.
Due to an increase in the number of failed loans
over the past few years, lenders have increased their
scrutiny of the potential risk of collateral property.
Many lenders have developed their own standards
and due diligence questionnaires to assist in identi-
fying potential risks at a subject property, and they
typically involve legal counsel and environmental
consultants to assist with their evaluation. The tech-
nical merits of these questionnaires are variable,
some focusing on risk management or reduction of
potential environmental liabilities. The format and
scope rarely provide added value to the post-trans-
action operations, but identifying these differences
up front and incorporating lender requirements at
the beginning of the process, streamlines the due
diligence efforts.
Environmentally conscious industries (strate-
gic/corporate buyers) and private equity frms have
recognized the potential for fnancial exposures
from environmental risks over the life cycle of their
investments and are implementing comprehen-
sive auditing programs to manage their potential
exposures. These internal environmental audits,
whether they are ISO 14001 or other environmen-
tal management systems (EMS), seek to provide
systematic environmental programs to help prevent
environmental problems and eliminate the need for
remedial action.
The EMS usually includes an auditing plan that
provides a periodic check that the system is working.
The EMS audit may supplement the due diligence
assessment. On the other hand, if an EMS is not
in place, the due diligence audit may serve as the
initiation of the EMS or at least defne defciencies.
The ASTM audit report should be in a format that
is useful for incorporation into an EMS.
Buyer/Sellers
Buyers and sellers often perceive environmental
due diligence to be just another checklist item at the
closing of their real estate transactions. The poten-
tial ramifcations of completing the diligence late
in the process are immense. A thorough and useful
due diligence effort requires a reasonable amount
of time to gather data and present the information
in a manner that makes sense to business people.
Environmental Due Diligence | 29
Furthermore, the property owner may have fnan-
cial responsibility for the environmental condition
of the property even though the owner may not
have directly caused the contamination.
These days, many sellers are providing the envi-
ronmental audit information to prospective buyers
as part of the initial business or property informa-
tion package. Therefore, any representations, war-
ranties, and price adjustments made during the
transaction can refect the buyers knowledge and
understanding of the conditions of the property.
If the buyer relies on the sellers information, the
seller has set the stage for the value discussions. An
objective audit by a qualifed consultant should be
performed to provide a fair and accurate represen-
tation of the current environmental condition of
the property.
Legal Counsel
The environmental sophistication of an owners
environmental counsel is important to the develop-
ment of the objectives of a due diligence program.
In todays economic climate and corporate down-
sizing, a considerable number of companies do not
have the resources to stay in compliance with appli-
cable environmental regulations. They are unaware
of the requirements under the law and the ramif-
cations for failure to comply with these regulations.
Examples of exposures include fnes for exceed-
ing existing permit limits/conditions or operating
without permits. There are potential civil and/or
criminal charges for negligence or failure to comply.
The detrimental publicity from an environmental
incident and the resulting stigma is damaging to a
companys image or brand and may be suffcient
motivation for compliance. However, under ex-
treme pressure in a tight economy environmental
compliance may not be given suffcient attention to
prevent non-compliance. Legal counsel has the dif-
fcult charge to educate the company on its corpo-
rate environmental exposures as the managers may
be unaware of the potential liabilities.
Insurance Advisor
Transaction insurance coverage can promote
the sale, investment, and re-development of higher
risk property by transferring environmental risks
away from owners and purchasers to an insurance
policy. Higher risk properties could include those
developed for industrial purposes, gasoline stations
and bulk petroleum terminals, dry cleaners, chemi-
cal manufactures, and mining operations.
Real estate or portfolio-wide transaction cover-
age is becoming more cost-effective and common
for all types of properties, and the deal team often
benefts from having a good insurance advisor avail-
able to help understand existing policies, determine
options for additional coverage, and assist with fnd-
ing old policies that may still provide a beneft to
the new acquisition. A Phase I Environmental Site
Assessment (Phase I ESA) provides an introduction
to the history of the property, but offers limited pro-
tection if an unknown or unexpected environmen-
tal risk is encountered post-acquisition.
Environmental Advisor
The environmental advisor or consultant takes
the lead during the due diligence process. The en-
vironmental consultant interacts with the plant op-
erating staff to fnd the truth about the property
history and conditions, operating procedures, and
compliance. Because the environmental consultant
is charged with collecting the audit information that
will be used by the deal team, it is important for
the environmental consultant to have access to all
information available, including all environmental
fles and documents. The consultant should also
be allowed to freely talk to long-term employees to
obtain their knowledge of past operating practices.
Frequently, a corporate representative of the seller is
at the property during the audit site visit. Although
their presence may be benefcial to the seller, it may
not facilitate the open disclosure of all relevant in-
formation to the buyer and his consultant.
30 | The Practical Real Estate Lawyer January 2012
Professional liability errors and omissions insur-
ance for the environmental consultant has become
a common requirement. The level of insurance
should be determined by the client, but the client
must be aware of the actual value of the insurance
and exclusions.
TYPICAL ELEMENTS OF DUE DILIGENCE
While every deal is different, most environmental
due diligence efforts will include a number of ele-
ments or tasks that may need to be completed by
the environmental advisor in conjunction with the
legal team. A key to successful environmental due
diligence is to recognize the nuances of the deal,
and to understand the skills and level of experience
needed to determine environmental liabilities of a
facility or portfolio of facilities.
Data Room Reviews (Buy Side)/Data
Room Preparation (Sell Side)
During most medium to large transactions, it is
common for a data room to exist where the seller
has provided company-related documents. The
data room can be a physical data room in which
hard copies of the documents are available for the
buyer to review. However, with most transactions
involving an auction process with multiple potential
buyers, a virtual data room is commonly prepared,
usually by the sellers investment banker, where elec-
tronic copies of company related documents can be
accessed. Most electronic data rooms are organized
with the following areas:
Corporate and organization;
Business and operations;
Financial;
Tax;
Human resources;
Real and leased property;
Capital expenditures;
Suppliers and customers;
Insurance;
Material contracts and agreements;
Litigation;
Information technology;
Environmental.
Typical documents that can be found in the en-
vironmental section of the data room include:

Phase I and Phase II ESAs;
Remediation and operation and maintenance
reports;
Environmental and/or operating permits,
Agency correspondence;
Notices of violation;
Consent decrees with regulatory agencies;
Environmental capital expenditures and bud-
get summaries; and
Information regarding environmental reserves.

The level of effort to review the data room doc-
uments depends on the size and number of docu-
ments posted in the data room. When reviewing
data rooms, environmental counsel and the environ-
mental consultant should not limit their review only
to documents located in the environmental sec-
tion. The entire data room should be scanned by an
experienced consultant to identify documents that
will assist in the assessment of environmental liabili-
ties of the target. These documents often include a
summary of leased properties and formerly owned
properties, fnancial information relative to envi-
ronmental reserves, environmental litigation mat-
ters, and specialty environmental issues that may be
pertinent to the company (such as Proposition 65 in
California or ISRA in New Jersey). Care should also
be taken to revisit the data room on a regular basis,
as additional documents are commonly added to
the data room as the deal progresses.
Environmental consultants are often asked to
assist sellers in the preparation of the documents to
be placed in the data room. Determining the types
of documents to place in the data room should be
Environmental Due Diligence | 31
discussed with environmental legal counsel and the
company. Often times the environmental consultant
will rely on the environmental manager of the com-
pany facility to provide the necessary documenta-
tion. Populating the data room with environmental-
related documents takes time, and when possible
this should be carefully thought through as early as
the deal process allows.
High Level Information Requests
(Documents, Questions) To Company
It is common early in due diligence to prepare
document/information requests to the seller. Typi-
cally, these early document requests are at a very
high level, but as the deal progresses, very specifc
or targeted document requests (deeper-dive re-
quests) are prepared. These often include a list of
questions that the environmental consultant and
legal counsel have generated after the review of in-
formation in the data room.
Conference Calls With Company
Representatives
It is common, especially when there is limited
time to conduct due diligence, for the environmen-
tal consultant and legal counsel to request a confer-
ence call with company representatives. The main
purpose of these calls is for the potential buyers
environmental team to hear directly from company
representatives on important environmental health
and safety (EH&S) risks. The company representa-
tives on the call will typically include the general
counsel, company CEO/CFO, corporate EH&S
manager, and facility-specifc EH&S managers.
Environmental Desktop Reviews
Environmental desktop reviews are a good
tool to use, and in some cases the only tool to use,
when there is a very short time frame to conduct
due diligence (i.e. a week or two). An environmental
desktop review consists of a review of a facilitys
environmental condition using publicly available
resources. These resources can include government
regulatory databases and a review of historical
information including fre insurance maps, topo-
graphic maps, street directories, and aerial photo-
graphs that are either available online or through a
database provider. Site visits and interviews with fa-
cility representatives are generally not conducted as
part of a desktop review and as a result, the desktop
review does not meet the ASTM 1527-05 Standard
in providing CERCLA liability protection.
The deliverable from an environmental desktop
review can vary depending on the needs of the deal.
Issues of concern, if any, identifed during the desk-
top review for each facility location in the company
portfolio are usually summarized in tabular format.
Generally speaking, environmental desktop re-
views can give a potential buyer a qualitative un-
derstanding of known or potential environmental
liabilities; however, a quantitative analysis of envi-
ronmental liability is generally not able to be under-
stood given the limitations of the review.
Site Visits: Phase I ESAs, MCRs,
EcoValueScreen
During due diligence, it is often required to
conduct site visits at some or all of the company
facilities in the deal portfolio. The purpose of the
site visit is to obtain information about the environ-
mental conditions of the property that one would
not obtain from other elements of due diligence.
This additional information from the site visit can
fall into the following categories:
Phase I ESA. The Phase 1 ESA collects ad-
ditional information from the facility based on
the necessary elements identifed in the ASTM
1527-05 standard. This includes the identifca-
tion of any recognized environmental condi-
tions;
32 | The Practical Real Estate Lawyer January 2012
EH&S compliance. Typically during due
diligence, environmental compliance audits are
not conducted. However, it is often useful dur-
ing a site visit to verify that there are no mate-
rial defciencies or substantial capital expendi-
ture needs associated with the environmental
management of the facility. This can be accom-
plished by completing an interview and ques-
tionnaire with a person knowledgeable of the
environmental management of the facility, a re-
view of available permits and other supporting
documents, and a walk-through of the facility.
The scope of work will not generally include a
detailed review of facility environmental fles or
independent verifcation of regulatory permit
application information, data, calculations, air
emission inventories, or engineering designs.
A review of OSHA worker health and safety
compliance during the site visit is usually lim-
ited review of available on-site incident logs and
safety documents and identifcation of any ex-
isting notices of violation provided by the facil-
ity EH&S manager;
Confrm facility conditions. Many times it
is not feasible to visit all facilities in a portfolio
given time constraints of due diligence. In some
cases, however, it may be important to verify the
conditions at a facility of a certain number of
sites in a portfolio. These sites are usually those
that have the most signifcant potential environ-
mental liability, such as sites with ongoing sub-
surface investigations or remediation;
EcoValueScreen. Improved environmen-
tal performance can reduce business costs and
have a positive effect on EBITDA. Identifying
operational changes that will reduce key envi-
ronmental impacts intrinsic to an asset will assist
in positioning the asset for a positive return on
investment. The operational changes may also
lead to opportunities to generate revenue that
was not previously recognized. It is important
to evaluate these elements as an add-on com-
ponent to environmental due diligence if deal
teams want to capitalize the earning potential
of the asset or portfolio of assets.
Phase II Investigations
If warranted and if time is permitted in the due
diligence time frame, environmental sampling is
generally undertaken in two stages. The initial stage
(a limited Phase II of most projects) is to obtain
samples in areas of suspected contamination to re-
duce the uncertainty of the potential environmental
liability of the property. From the Phase I ESA pro-
cess, it is important to have some idea of the type
of contaminants that may be present in order to de-
termine appropriate analytical tests. For example,
oil-stained soil around transformers would be tested
for oils and PCBs, but oil stains at an automobile
service station are often analyzed for oils, PCBs,
fuels and volatile organic compounds, which are
normally found in gasoline or fuids drained from
automobiles or hydraulic lifts. During these limited
Phase II investigations, the extent of contamination
is usually not identifed.
A second stage of sampling may be undertak-
en to determine the signifcance of contamination
confrmed during the limited Phase II if the uncer-
tainty is not reduced enough to provide comfort to
the new buyer, or to further evaluate the potential
liability of a sensitive risk issue (e.g. ecological risk,
risk to off-site drinking water sources, risk to on-site
workers or off-site receptors from vapor intrusion,
etc). It is important for legal counsel and the en-
vironmental consultant to communicate the likely
and potential risks associated with subsurface im-
pacts, and to understand the risk tolerance thresh-
olds (i.e. deal stoppers) of the client early on in the
due diligence process. Also, impacts to subsurface
may be controlled or managed enough by certain
remediation technologies or insurance products to
get the buyer comfortable with the risk.
Environmental Due Diligence | 33
If the feld investigation is thorough, a reme-
diation plan can be developed that includes capital
and operating costs. The remediation plan can be
reviewed by all parties, and cost sharing can become
part of the transaction. Thus, the more an environ-
mental problem can be defned quantitatively in dol-
lars, the more likely all parties will become comfort-
able with it and allow the transaction to proceed. It
is important to note that the purpose of the Phase II
investigations during due diligence is to better quan-
tify the potential environmental liabilities associated
with known or potential subsurface impacts. Data
that is collected during these due diligence efforts
may or may not meet the sampling requirements of
a more stringent regulatory program.
State And Local Sampling Data Reporting
Requirements
In an increasing trend, local (state and munici-
pal) agencies are requiring permits for the instal-
lation of groundwater monitoring wells. With the
permit comes the obligation for reporting the ana-
lytical results to the issuing agency. These possible
requirements should be reviewed before deciding
on sampling of media and the confdentiality of
collected data. These types of reporting obligations
may violate confdentiality agreements executed for
the transaction by the parties. Other states are de-
veloping transfer laws that require knowledge from
the legal and technical perspectives. Illinois, New
Jersey, Connecticut, South Carolina, and Indiana
are just a few states that have implemented transfer
laws. Some of these require the sharing of collected
media data and formal submittals through their
program offces. These programs raise a number of
concerns in the context of a transaction, in which
timing and the confdentiality of data are many
times very important criteria for the deal. The abil-
ity to go in and collect groundwater samples to ad-
dress a potentially signifcant issue, can result in a
reporting obligation for the property owner, many
times impairing the owners and deals future.
State programs for Brownfeld development
also have specifc criteria for data gathering, report-
ing, and voluntary cleanup standards. The follow-
ing EPA website presents a state-by-state summary
where their programs are characterized and other
criteria are reviewed in some detail. The link is
http://epa.gov/brownfelds/pubs/st_res_prog_re-
port.htm.
Agency File Review
There are times when either the buyer or seller
may want to consider reviewing the fles located
in local, state, or federal environmental regulatory
agencies if there is enough time in the due diligence
period. From a sellers perspective, it may be ben-
efcial to understand what documents exist in an
agencys fle that could potentially affect a deal. It
must be noted that most regulatory agencies require
notice before review of their fle materials, and it
can take up to several weeks or longer to obtain ac-
cess to the fles.
Interactions With Deal Team
During the due diligence period, the environ-
mental advisor typically interacts with the clients
legal counsel, lenders, insurers, etc. The environ-
mental advisor must be able to clearly and succinct-
ly communicate fndings of due diligence to these
parties.
DETERMINING THE TYPE AND AMOUNT
OF DATA TO GATHER Every transaction is
different. Consequently, there are a number of fac-
tors that will affect the decision on the type and
amount of data to gather during the due diligence
time period. Factors that may infuence this deci-
sion are discussed below.
Structure Of The Deal (Stock,
Asset, As-Is, Etc.)
The as-is deal is usually promoted by a seller to
avoid actual assessment of the environmental con-
34 | The Practical Real Estate Lawyer January 2012
dition of the property. The seller may be motivated
by a desire to avoid the complications that environ-
mental matters may bring to the transaction or may
be concerned about triggering reporting obligations
that bring a regulatory agency into the matter. This
type of transaction is one of the most challenging
for the due diligence team as it limits the buyers
ability to remove uncertainty about the environ-
mental condition of the property. Combined with a
fast-track schedule, the auditing team must quickly
focus and perform issue spotting so as to identify ar-
eas of potential environmental exposure. In a typi-
cal as-is deal, the buyer has requested that the con-
sultant perform environmental due diligence, but
the seller will allow only limited interviews and few
personnel at the facility are knowledgeable that the
potential transaction is taking place. Without access
to knowledgeable personnel, the review of pertinent
fles is more important to understanding potential
exposures. More frequently these fles are provided
in an actual or electronic data room that contains
copies of the disclosed information. Environmental
professionals review this information so that their
cost and potential liability assumptions are more ac-
curate. This has also become a very effcient way
to provide multiple bidders, or prospective buyers,
with access to the disclosed information.
In the majority of large transactions, soil or
groundwater sampling is not permitted by the buyer
in the context of due diligence. In these instances,
the environmental due diligence team is left to pro-
vide an evaluation of the environmental exposures
and their associated cost ranges based on assump-
tions about the property conditions. Under these
conditions the audit fails to signifcantly reduce
the degree of uncertainty about the environmental
conditions of the property.
Even if the property owner limits access to infor-
mation, there is a signifcant and growing body of
publicly available information. Information about
current and historical property use can be discov-
ered from aerial photographs and fre insurance
maps. The fles of regulatory agencies, the fre de-
partment, local health department and emergency
planning committees are all sources of information
about various aspects of the property operations,
including spills, fres, complaints, and chemical us-
age. The auditor can determine the vulnerability of
the area to contamination by assessing the local and
regional soil surveys, water well logs, and geological
and hydrogeological reports.
One purpose of environmental due diligence
in a real estate transaction is to allow the buyer to
avoid or qualify the risks, if any, associated with
environmental conditions so that a buy/dont buy
decision can be made and a purchase price and
agreement that refects the environmental risks with
the property can be negotiated. If the uncertainty
about the environmental impairment to the prop-
erty is great, the buyer usually assumes the worst
case and signifcantly over estimates the damages
and impairment. The seller, likewise, is engaged in
a similar decision making process. The seller, with
a better understanding of the property conditions,
assumes signifcantly less environmental impair-
ment and higher property value. Thus, under the
as-is deal, both parties are negotiating from a set
of assumptions about the environmental condition
of the property that may lead to dispute and dif-
fcult negotiations. With an objective Phase I ESA
both parties share the same level of knowledge of
the environmental liabilities of a property, and the
purchase agreement can be drafted or amended to
refect the property conditions through representa-
tions or warranties that the buyer and seller agree
upon.
Auction Deal Process
A popular method of selling large companies
is to run an auction process, typically managed by
an investment bank. In this process a secured, pass-
word protected, online electronic data room is estab-
lished. Prospective bidders and their due diligence
teams visit the data room for information regarding
Environmental Due Diligence | 35
the subject company. Environmental data, reports,
etc. are posted for review by potential buyers. These
data room are open 24/7 so the time period for re-
view is very short, typically less than a week. Envi-
ronmental diligence is performed in the data room,
questions and issues developed, and a call with the
seller representatives typically takes place.
Site visits in the early stages of the auction are not
performed. A table of risks and potential impacts
is created for each property or site included in the
sale. Prior owned sites are also evaluated as are cur-
rent litigations, and other exposures identifed to be
material items to the fnancial performance of the
company. Most auctions have two or three rounds,
in which the bidders provide their bid for the com-
pany. Due diligence is often very weak in the early
stages, usually only consisting of issues spotting and
the formulation of basic questions. However, levels
of effort increase as the process moves forward and
the environmental issues are more precisely iden-
tifed. In some later stages of due diligence in the
auction process, selected site visits may be made.
The level of effort the buyers team will place in
the project is determined by the quality of informa-
tion provided by the seller. The more complete and
current the information, the easier the process typi-
cally runs and the less disruptive the process is to the
overall transaction. Due diligence in this process is
high-level and focused on the levels of materiality
established at the beginning of the process by the
potential buyer.
Amount And Type Of Information In The
Data Room
The amount, and more importantly the age,
of information presented in the data room can
greatly affect the amount of due diligence that is
conducted. Often, the ultimate scope of the due
diligence cannot be determined until the data room
is reviewed. Generally speaking, if Phase I ESAs
conducted to the ASTM 1527-05 standard are less
than six months old in the data room, it is not likely
that new Phase I ESAs will be needed as these
Phase I ESAs are considered to be valid Phase I
ESAs by ASTM 1527-05.
Number Of Facilities In Portfolio
The number of facilities in a portfolio that is
part of a deal, in conjunction with the amount
of time available for due diligence, can affect the
scope of due diligence. In some cases, only select
representative facilities are visited if the num-
ber of facilities in the portfolio is great. Given that
the time frame for most due diligence efforts is on
the scale of weeks to a month, up to 20 to 30 sites
should be manageable by the environmental due
diligence advisor in that time frame, should site vis-
its be necessary.
If there are many facilities in the deal (i.e. great-
er than 30), it may not be feasible or cost effective
to conduct site visits or Phase I ESAs, as described
above. In these cases, an environmental desktop re-
view may be a useful tool in understanding envi-
ronmental issues with multiple facilities. These en-
vironmental desktop reviews can be very useful for
non-industrial facilities.
Owned vs. Leased Properties
In general, most due diligence efforts are mag-
nifed when property is owned rather than leased.
From an environmental perspective, there are cer-
tain legal responsibilities regarding property con-
tamination, including investigation, reporting, and
remediation, that exist with the owner of a prop-
erty that may not exist with a lessee. The key with
leased properties is to conduct enough diligence
to understand what obligations exist in the lease
agreement with respect to environmental issues, to
understand the operations that are conducted by
the lessee, and what extent these operations have or
have not impacted the subsurface conditions of the
property. There could also be signifcant liabilities
related to environmental compliance regardless of
whether or not the property is owned or leased.
36 | The Practical Real Estate Lawyer January 2012
Manufacturing vs. Other Use
(Warehouse, Offce, Etc.)
Usually, the level of diligence tends to increase
for facilities that are used for manufacturing pur-
poses, compared to non-manufacturing facilities
such as warehouses, offces, and undeveloped land.
When considering whether or not to conduct site
visits, the use of the facility (manufacturing vs. non-
manufacturing) may assist in this determination.
Time frame Of Due Diligence
The time available to conduct due diligence
varies from deal to deal and the amount of time
can drastically affect the amount of diligence that
is conducted. For most due diligence efforts, about
three to four weeks is an ideal time frame to conduct
most elements of due diligence. In cases when this
time period is shortened, it may make sense to con-
duct additional diligence during the time between
signing and closing, if there is suffcient time during
this period.
Requirements Of Lenders
As early as possible in the due diligence process,
any special requirements of the lending partner
need to be determined. For example, this could in-
clude the need for Phase I ESA reports that were
developed within the last six months, material regu-
latory compliance reviews, regulatory fle reviews,
targeted site visits (in lieu of Phase I ESAs), use of
the lenders environmental questionnaire, level of
materiality, and involvement of the lenders envi-
ronmental counsel and consultant early on in the
process. If the standard environmental due dili-
gence scope of work needs to be reduced or aug-
mented due to certain deal constraints (e.g. timing,
confdentiality, limited site access, limited data room
documents, etc.), the changes need to be discussed
with the lending partner to ensure that they are
comfortable with the reduced level of effort.
In todays economic climate, it is more common
to have more than one lender involved in the trans-
action (especially for deals that exceed $1 billion) to
spread out the risks. If this occurs in a deal, differ-
ent lenders may have different environmental due
diligence requirements, risk tolerance, and expecta-
tions, which can lead to additional time and effort
by legal counsel and the environmental consultant.
This needs to be addressed with the client at the on-
set of the due diligence scope of work.
Buy Or Sell Side Of The Deal
It is common for the seller to prepare a data
room or to provide information that meets the
minimum expectations of the buyer. Therefore,
it is incumbent on legal counsel and the environ-
mental consultant to extract additional information
from the seller to suffciently reduce the uncertainty
of the known and potential liabilities associated
with the asset. This often involves one or more it-
eration of data requests and answers to pertinent
questions as discussed above. It is important to take
the attitude of what you dont ask for you dont
get into the due diligence process especially when
there is likely material issue involved. Of course, the
buyer needs to be sensitive to the deal dynamics and
not ask for too much information that does little to
reduce the uncertainty.
In addition, there may be an opportunity when
the deal is signed (but not yet closed by a Purchase
Sale Agreement) to conduct deeper dives into ma-
terial issues including targeted site visits or Phase II
activities. This possibility should be explored with
the seller and the deal team early on in the due dili-
gence process.
Facilities With An International Presence
It is very common for larger portfolios to have
property and operations internationally. This will
require additional time and effort by legal counsel
and the environmental consultant to coordinate
resources, extract necessary information, and com-
municate risks to the client. If an asset is being pre-
pared for divestiture, additional time and effort is
Environmental Due Diligence | 37
usually needed to obtain pertinent data room docu-
ments from international locations. It is important
in most deals that involve international assets to en-
sure that legal and consultant resources are on the
deal team that understand the local and national
regulatory issues and climate, as well as regulators,
to ensure that the environmental liabilities and any
known or pending changes to pertinent regulations
are well understood.
If Phase I ESAs are required, it is necessary to
discuss with legal counsel and lending partners the
expectations of the scope of work and content of
the reports for countries that do not necessarily ad-
here to U.S. standards. In some countries, for ex-
ample, it may take several weeks to obtain environ-
mental database information that can routinely be
obtained in the U.S. in a manner of hours or no
publicly available data may be available at all. Any
limitations to a standard U.S. due diligence scope
of work should be discussed early on with the client
and its lending partners.
REPORTING DUE DILIGENCE FINDINGS
During the performance of environmental due
diligence, if potential contamination is identifed,
the client should be verbally informed of those con-
ditions in an expeditious manner so that the ramif-
cations can be explored at that time and appropri-
ate plans can be made for subsequent investigations.
Verbal communication with the client is imper-
ative to avoid any surprises in the written report.
One of the most diffcult aspects of the written re-
port is reaching conclusions as to the environmen-
tal conditions of the property and, specifcally, the
signifcance of potential contamination. The failure
to effectively communicate the condition of a prop-
erty can undermine the work product developed.
It is imperative that all parties understand the
signifcance of, and risk associated with, written
documentation presenting contamination of the
property. If contamination is suspected, the client
may wish to proceed immediately with the sampling
program to address these concerns. Before initiating
a sampling program, the objectives must be clearly
communicated to all parties, including the seller,
if the transaction is contingent on receipt of sam-
pling results. Some sharing of costs may often be
negotiated before performing the sampling. Legal
and regulatory issues become important, including
knowledge of contamination of the property, spe-
cifcally, potential reporting obligations to agencies.
The sampling and analytical protocols utilized by a
consultant must conform to accepted professional
standards, standards consistent with the process of
litigation, and local and state guidelines.
Typical Due Diligence Deliverables
Typically, the scope of the environmental due
diligence will in part dictate the type of documen-
tation that will be desired in a deal. For example, if
Phase I ESAs are needed or required, then Phase
I reports are prepared, typically in a format that is
consistent with the most recent ASTM 1527 stan-
dards. If a review of material compliance issues is
also conducted, these fndings are often also pre-
sented in the Phase I report. If an environmental
desktop review is conducted, a summary of fndings
is prepared, and usually summarized in a tabular
format.
In addition to the reports described above, the
fndings of the due diligence, and more importantly
the estimate of environmental liability, should be
documented in a report to legal counsel (environ-
mental liability report). This report should include
an overview of the scope of due diligence con-
ducted and the estimated environmental liabilities.
The overview of environmental liabilities should be
clearly and succinctly summarized at the beginning
of the report, as it presents the bottom line of the
due diligence fndings. The liability is often broken
down into the following buckets:
Known liability. Known liability includes
costs related to subsurface liabilities, includ-
38 | The Practical Real Estate Lawyer January 2012
ing ongoing site remediation or costs related to
EH&S compliance, including those related to
NOVs or permit defciencies;
Potential subsurface liability. These are
liabilities that could, if triggered in the future,
result in costs related to such things as investiga-
tions and remediation. Typical triggering events
could include a property transaction, a building
expansion or underground utility project, or a
requirement from a regulatory agency; and
Potential EH&S compliance liability.
Limitations or key assumptions of the due dili-
gence should be clearly documented. Lastly, the re-
port should include a detailed breakdown of the en-
vironmental liabilities on a facility-by-facility basis.
This section of the report should present a range of
liabilities for each issue, discussed below.
Estimate Of Environmental Liability
It can be very diffcult for the consultant to
quantify a specifc dollar value for remediation or
compliance efforts due to the uncertainty that is
inherent in the environmental risks associated with
the asset. The uncertainty is typically addressed with
assumptions that support a range of costs that may
be necessary to address the risk. The assumptions
are developed from information that is obtained
during the due diligence process, professional expe-
rience, and other publicly available resources and
websites. For example, the consultant may estimate
soil volumes that need to be remediated from pos-
sible release of hazardous substances for petroleum
products, or costs to complete an ongoing reme-
diation project based on the available information
(e.g., a long-term groundwater pump-and-treat op-
eration). Usually a best case, likely case, and worst
case cost estimate is developed for each identifed
known or potential liability. The range of costs can
be probability-weighted to assist the deal team and
lending partners in better understanding where the
true downside risk is within the context of the deal
and the risk tolerance of stakeholders.
In many expedited due diligence efforts, the fa-
cilities are large and have a long history of opera-
tions. In some cases the regulatory agency involve-
ment at a site has been signifcant and a number of
site areas may have been through agency program
review and closure. In these cases, the ability to as-
sess the completeness of the response and the likeli-
hood of future agency involvement on this specifc
issue are diffcult to predict. If there is a post-closure
care bond or letter of credit, then a careful review
of the estimate for fnal closure should be reviewed.
Identifying these types of issues early on is essential
to completing a due diligence effort that is focused
and benefcial to the client.
We have found that providing broad potential
cost ranges for poorly defned environmental expo-
sure is useless to business decision makers. ASTM
has published a guide to estimating environmental
liabilities entitled ASTM E 2137-01, Standard Guide
for Estimating Monetary Costs and Liabilities for Environ-
mental Matters. The Payne Firm developed an ap-
proach designed to reduce fnancial uncertainty. To
better quantify exposures, we develop an expected
cost based on the probabilities of possible outcomes.
Applications of this process include both remedia-
tion and compliance issues.
EcoValueScreen Results: Cost Saving Op-
portunities
Strategic and private equity buyers are increas-
ingly committed to integrating environmental, so-
cial, and governance (ESG) -responsible investment
guidelines into pre-investment and post-investment
processes, and to monitor their implementation and
results. These buyers recognize that in todays global
market, implementation of these guidelines is nec-
essary to sustain corporate earnings and for port-
folio companies to stay competitive, and are now
including an analysis of ESG issues as a component
of their due diligence process. The challenge facing
legal counsel and environmental consultants is to
understand the effect that key environmental vari-
Environmental Due Diligence | 39
ables are having on the environmental performance
of a target company within the time constraints of
due diligence, including the identifcation of opera-
tional changes that can be implemented to reduce
the environmental impacts intrinsic to the target or
portfolio.
Environmental impacts intrinsic to a business or
portfolio could include key variables such as exces-
sive energy consumption, greenhouse gas emissions,
and water use; unnecessary waste generation; car-
bon cap and trade requirements; and the excessive
use of chemicals, petroleum products, and raw ma-
terials. The degree of risk and potential cost-savings
that these variables and others have on an invest-
ment is very dependent on the business sector that
the investment is in, and will vary within and outside
of the United States depending on the regional and
international footprint of the asset. However, the
due diligence process to identify the risks and cost
saving opportunities does not differ from sector to
sector or country to country. The key is to identify
the opportunities and gain a baseline understanding
of how the impacts can be reduced through opera-
tional improvements or other measures.
Due Diligence Value Creation
Once due diligence is complete and the Pur-
chase Sale Agreement is prepared and signed, it
is important for the buyer to start down the path
to maximizing its investment in environmental risk
management, risk reduction, and performance im-
provement. The information obtained during due
diligence is invaluable to risk management and val-
ue creation going forward, and can assist in identi-
fying higher and moderate risk issues to manage in
the 100-day management plan as new leadership is
installed to lead the company.
For example, environmental performance ini-
tiatives identifed during the EcoValuScreen pro-
cess can be easily integrated into post-acquisition
management and fnancial plans, and tracked,
measured, and adjusted during the investment peri-
od. This will ensure that at the time of divestiture a
viable record of the cost benefts associated with en-
vironmental impact reductions through operational
improvements can be clearly represented to future
prospective purchasers and the lending community.
Other examples of value creation can include:
A more systematic approach to managing a
portfolio of remediation sites including a clear
understanding of the opportunities and con-
straints of existing indemnities, no dig claus-
es, and environmental cost baskets for known
or unknown liabilities;
Development of EH&S management programs
that ensure the proper training of managers
and personnel that will be involved in manag-
ing regulatory risks for the company;
Assisting management in identifying the envi-
ronmental risks and opportunities associated
with underperforming assets including the de-
velopment of a risk management strategy for
properties targeted for consolidation or dives-
titure that have a high potential for material
environmental liabilities (including the use of
insurance products to assist in the divestiture
process); and
Closure and environmental decommissioning
of properties that are targeted for idling or lease
to ensure that environmental risks for past op-
erations do not become and encumbrances to
generating future value from the property.
These activities should be identifed during the
frst year of the investment so that risk reduction
documentation and environmental improvement
of existing operations can be clearly documented
to a new buyer fve to seven years down the road.
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