Scotsman Guide - November 2008 Commercial Edition

Why Due Diligence is Necessary
Strong environmental assessments make for strong deals
By Derek Ezovski, managing director, property-due-diligence group, Environmental Data Resources

Today’s lenders are scrutinizing every aspect of a deal to make sure it is a good one. Environmental due diligence on commercial real estate deals is more important than ever.

Brokers who are armed with the knowledge of basic environmental due diligence can determine whether a property will make a good deal — or a bad one — for their clients and lending partners.

property-owners or occupants, a site visit to observe property conditions and a limited environmental-records review.

■■ Desktop review: Environmental-data companies compile, map and continually update millions of federal, state, local and

the no-cost approach to environmental due diligence, but it lacks outside verification. For this reason, the questionnaire’s usefulness is limited.

Regardless of the method used, conducting thorough environmental due diligence

The importance of due diligence Due diligence — the process of getting as much information as possible about a transaction before closing — is a proven

“When it comes to commercial real estate, one of the
most-common issues that impairs — or even kills —
deals is environmental contamination.”

Derek Ezovski is managing director of the property-due-diligence group at Environmental Data Resources. Before joining EDR, Ezovski worked for FleetBoston Financial and helped create the

environmental policy for the bank’s small-business-services division. Reach Ezovski at (800) 352-0050 or at dezovski@edrnet. com. To learn more about EDR, visit www. edrnet.com.

way to avoid bad deals and litigation. When it comes to commercial real estate, one of the most-common issues that impairs — or even kills — deals is environmental contamination. For this reason, lenders routinely require some sort of pre-purchase environmental screen.

Depending on the goals and the terms of the deal, lenders can use one or more of the following screening tools to check for contamination:

■■ Phase I environmental site assessment: Prepared by an environmental professional, a Phase I assessment includes a review of available records for the subject property and its surrounding area, a review of historical records, a site visit, and interviews with past and present owners, operators and occupants. The final report contains documentation of all records reviewed, observations made during the site visit, results of the interviews, an explanation of any gaps in data and any recognized environmental conditions uncovered. It also includes conclusions and recommendations.

■■ Transaction-screen assessment: Prepared by an environmental professional or bank officer, the transaction-screen assessment consists of a questionnaire for

tribal environmental records culled from public databases. Lenders can order and retrieve reports, which help identify environmental concerns on the target property and its surrounding area for any U.S. location. Historical information is also available.

■■ Environmental questionnaire: The property questionnaire is a basic document that contains anywhere from 10 to 25 questions designed to determine if a property has any environmental conditions. The lender typically submits this document to the borrower or seller for completion. As a result, this environmental-screening tool represents

early in the deal gives brokers and their lenders an advantage. By learning about potential problems upfront, they have time to address any issues before closing.

Tighter due-diligence practices allow all parties in the deal to understand the extent and potential costs related to the exposure in a timely manner. If problems arise, deal terms can be restructured, if necessary.