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October 30, 2019

How Much Environmental Due Diligence Do You REALLY Need?

By Chris Gregor, MES

ENVIRONMENTAL RISK ASSESSMENT FOR UK INVESTORS

Environmental issues can cause a real headache for commercial real estate investors in the United Kingdom. To protect yourself against costly cleanups, delays, or lowered asset values, you must understand any environmental risk associated with an asset before you invest—hence the need for thorough environmental due diligence. There are, however, a range of options for environmental assessments—how do you know which level of assessment you require? This depends on the kind of transaction you are doing as well as your own risk appetite.

First, a brief overview of the various levels of environmental risk analysis:

Desktop Study/Database Review: the subject site is evaluated through a review of existing documentation such as government records, historical records, and questionnaires.

Preliminary Risk Assessment (PRA) or Phase I: The PRA or Phase I Environmental Site Assessment a includes the desktop study evaluation and a site walkover. This assessment will identify material environmental concerns which may impact the health of the occupants, the surrounding environment and residents, or the value and usability of the property. Part 2A of the UK Environmental Protection Act requires the mitigation of unacceptable risks posed to human health and the environment by land contamination; the PRA will identify the presence of contaminants that may create these unacceptable risks. Further, environmental concerns must be addressed prior to any Local Authority consent for development.

Conceptual Site Model (CSM): Data from the PRA is used to create the CSM, an initial contaminant – pathway – receptor view of the site. The CSM (via diagram and/or written form) identifies suspected contaminants, their potential locations and impacted media, and the risks of contamination to the varied users of the property.

Phase II Investigation: Also known as Intrusive or Ground Investigation. When a PRA uncovers potential for contamination, a Phase II Investigation is used to confirm the presence or absence of contaminants via soil, groundwater, and/or soil vapour (ground gas) sampling.

Properly conducted, a PRA is the gold standard for assessing environmental risk. The UK government recommends a PRA prior to any purchase or development of any real estate asset.

Clients may choose to perform a Desktop Study if they have previous site reports that support a lack of data pertaining to contaminative issues or to pre-screen a site for a better understanding of the potential issues they may have to face. For multi-asset acquisitions, desktop studies (no site inspection) are often performed across the whole portfolio of assets, with full PRAs performed only on those sites that do not pass muster at the initial review level. If you choose to employ the Desktop Review, recognise that due to its limited scope, a Desktop study yields limited data, which may lead to increased environmental risk exposure.

If the property is part of a development or construction project, then Preliminary Risk Assessment with Conceptual Site Model will need to be completed. In consideration of various public interest and safety factors such as surface/controlled waters, sites of special interest, or former mining and landfill sites, planning applications incorporate an environmental component that must be completed prior to the granting of planning consent. If you are not planning to develop your site, then you may choose to forgo the Conceptual Site Model.

If you are uncertain what level of environmental assessment is appropriate for your project, a qualified environmental consultant can help you make that determination. An environmental consultant can also advise you how to interpret and address the findings of your environmental risk assessment.

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