What Is Environmental Due Diligence?

Jessica Ellis
Jessica Ellis

Environmental due diligence (EDD) involves analyzing the potential and existing environmental risks of a commercial or industrial property. In some places, EDD examinations are standard or even required for most commercial and industrial land and property purchases. Among other things, the findings of an environmental due diligence report can affect the availability of loans for purchase, and the purchase price of the property.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

Not all land is created equal; thanks to various natural and man-made activities, land, groundwater, and even the air in an area can become dangerously polluted or contaminated over time. Long forgotten landfills can release dangerous gases, radioactive materials can contaminate soil, and industrial runoff from miles away can poison groundwater sources. If an environmental health risk exists, it can pose dangerous and even deadly threats to people unaware of the situation. In the 1980s, environmental due diligence reporting became common in the commercial world as part of the responsibility held by persons or organizations trying to sell land.

Depending on the region, specific standards may apply to an EDD inspection and report. In accordance with the applicable standards, certified inspectors may need to take soil and water samples, investigate public records, interview owners and previous workers on the land, and consult topographical maps. All findings are carefully checked and recorded, and presented to the property owner or sales company. In some cases, the owner may then take steps to reduce any environment dangers outlined in the initial report, then request a second or ongoing inspection. Since an EDD report detailing many problems can materially affect the price and financing of the property, many owners find it less expensive to comply with suggested fixes before putting the property on the market or setting a final price.

In addition to providing a list of environmental hazards and formulating possible solutions, environmental due diligence inspectors also typically perform a cost analysis of the damage and required repairs. This can help the owner determine the total cost of fixing environmental hazards versus the hit dealt to sale price and financing should the problems go unmet. The report may also include a comparison of hazards to state, federal, or local laws on environmental safety, to show any areas where the property is non-compliant with legal standards.

In some cases, buyers can waive environmental due diligence requirements. This generally only occurs when the buyer has full personal financing, since most lenders will refuse to issue property loans with a current EDD report. A buyer may also choose to accept a limited EDD report, which may be confined only to public database and property record information.

Jessica Ellis
Jessica Ellis

With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica is passionate about drama and film. She has many other interests, and enjoys learning and writing about a wide range of topics in her role as a wiseGEEK writer.

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