What is environmental due diligence?

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

Not all lands are created equal; Thanks to various natural and man-made activities, the land, groundwater and even the air in an area can become dangerously polluted or contaminated over time. Long-forgotten landfills can release hazardous gases, radioactive materials can contaminate the 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 who are unaware of the situation. In the 1980s, environmental due diligence reports became commonplace in the commercial world as part of the responsibility of individuals or organizations trying to sell land.

Depending on the region, specific standards may apply to an EDD inspection and report. In accordance with applicable standards, certified inspectors may need to collect soil and water samples, investigate public records, interview previous landowners and workers, and consult topographic maps. All findings are carefully verified and recorded and presented to the property owner or sales company. In some cases, the owner may take steps to reduce any environmental hazards described in the initial report and then request a second inspection or an ongoing inspection. Since an EDD report detailing many issues can materially affect the price and financing of the property, many homeowners find it cheaper to comply with suggested corrections before putting the property on the market or setting a final price.

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In addition to providing a list of environmental hazards and formulating possible solutions, environmental due diligence inspectors typically also perform a cost analysis of necessary damage and repairs. This can help the owner determine the total cost of fixing environmental hazards compared to the negotiated settlement of the sale price and financing if the issues are not addressed. The report may also include a comparison of hazards with state, federal or local laws on environmental safety to show any areas where the property does not comply with legal standards.

In some cases, buyers may waive environmental due diligence requirements. This usually only occurs when the buyer has full personal financing, as most lenders will refuse to grant real estate loans with an up-to-date EDD report. A buyer may also choose to accept a limited EDD report, which may be confined to the public database and property registration information only.

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