Understanding Business Environmental Risks (BERs) in Commercial Real Estate

Gene Joanen, CEO and REM at Balance Consulting Inc.

At Balance Consulting Inc., we recognize that managing Business Environmental Risks (BERs) is crucial for maintaining the commercial value and operational continuity of real estate assets. Defined by the American Society for Testing and Materials (ASTM) in ASTM E1527-21, BERs encompass risks that could materially impact a business due to environmental factors associated with a property’s current or planned use. These risks extend beyond the scope of standard environmental assessments such as Phase I Environmental Site Assessments (ESAs).

Unlike Recognized Environmental Conditions (RECs) which pinpoint the presence or likely presence of hazardous substances, BERs encompass a broader range of environmental and business implications that may not necessarily trigger a Phase II investigation but are equally significant. Identifying and managing these risks early is key to preventing them from escalating into major issues that could affect property transactions or business operations.

Our Approach to Environmental Due Diligence

At BCI, we specialize in conducting thorough environmental due diligence. This process is essential not only for identifying RECs but also for evaluating broader BERs that could impact your business. Our environmental due diligence services are designed to uncover potential environmental liabilities and provide strategic insights that aid in property acquisitions, divestitures, and development projects.

By proactively managing these risks, we help safeguard the interests of all stakeholders involved, including property buyers, sellers, developers, banks, and legal professionals. Our goal is to ensure that these properties can continue to be a valuable part of commerce, and we even assist in securing specialty risk insurance for properties that might require additional risk mitigation.

Connect With Us for Expert Guidance

If you’re navigating the complexities of commercial real estate and need expert advice on handling environmental risks, don't hesitate to reach out. Our team at Balance Consulting Inc. is equipped to guide you through every step of your environmental strategy.

Discussions and context for a future intended use:

Defining risk levels for a buyer of industrial property involves categorizing the potential environmental risks based on the buyer's tolerance and willingness to manage those risks. Here's a structured way to define these risk levels, from zero tolerance for environmental risk to accepting the property "as is," and addressing issues as they arise:

1. Zero Tolerance for Environmental Risk:
• Description: Buyers with zero tolerance for environmental risk are typically those who cannot afford contamination due to the nature of their operations or strict regulatory compliance needs. These buyers require properties that have no known or potential environmental liabilities.
• Action: Such buyers may only consider properties with clean environmental records or those remediated to meet the highest standards, verified through comprehensive environmental site assessments and possibly additional testing.
2. Low Risk Acceptance:
• Description: Buyers willing to accept low levels of risk might consider properties with minimal and well-documented issues unlikely to interfere significantly with their intended use of the property.
• Action: These buyers might proceed with a purchase if minor remediation efforts are required or if there are strong indemnities from sellers. They would likely demand a clear plan for remediation and a risk management strategy before proceeding.
3. Moderate Risk Acceptance:
• Description: These buyers are open to properties with known environmental issues, provided that these do not pose a significant threat to health or business operations. They are typically looking for a balance between cost and safety and are willing to invest in some remediation.
• Action: Moderate-risk buyers might negotiate lower purchase prices to account for the needed remediation and will often engage in extensive due diligence to understand the scope of potential environmental management.
4. High Risk Acceptance:
• Description: Buyers at this level are prepared to take on properties with significant environmental issues. They might specialize in redevelopment or have business models that can accommodate extensive remediation.
• Action: These buyers will likely factor the costs of environmental cleanup into their business plans, negotiating significantly lower purchase prices and potentially seeking financial assurances or partnerships to manage the cleanup.
5. Full Risk Acceptance ("As Is"):
• Description: Buyers accepting properties "as is" are fully prepared to deal with all associated environmental liabilities. They may have extensive experience with contaminated sites or have specific plans that integrate the management of these risks.
• Action: These buyers perform due diligence to understand the full extent of environmental issues but proceed with no conditions regarding environmental quality. They are typically well-prepared with strategies and resources to handle ongoing monitoring and remediation.

For industrial clients, understanding these levels of risk acceptance can guide their investment decisions and help tailor their due diligence processes to match their risk tolerance and strategic objectives.

Understanding RECs and BERs in Environmental Due Diligence

Navigating the distinctions between Recognized Environmental Conditions (RECs) and Business Environmental Risks (BERs) is crucial for effective environmental due diligence. A REC represents the actual or probable presence of hazardous substances on a property, which is typically identified during a Phase I Environmental Site Assessment (ESA). If a REC is found, it often triggers a more detailed Phase II investigation to further assess the extent of contamination and potential remediation needs.

In contrast, a Business Environmental Risk (BER) involves broader considerations that may not directly trigger a Phase II investigation but are still critical to the overall assessment of environmental risk. BERs encompass risks that can impact the business associated with the current or planned use of a property, extending beyond traditional environmental issues to include legal, regulatory, and economic factors. These might involve non-environmental conditions such as zoning restrictions, community sensitivity, or economic obsolescence that could affect the property’s value or usability for certain business operations.

Importance of Addressing BERs

While BERs do not generally lead to Phase II investigations unless tied directly to physical contamination risks, they should not be overlooked. Identifying and assessing BERs is essential for thoroughly characterizing the nature of risks present, which in turn informs strategies for site development and risk mitigation. This comprehensive approach ensures that potential environmental liabilities are identified and managed before they can affect the transaction or the operational goals of the business.

 

The Goal of Environmental Due Diligence

The primary objective of environmental due diligence is to identify and manage risks associated with property transactions—whether acquisitions or divestitures. This process is vital to preserving the investment’s value by preventing environmental risks from becoming costly issues. Effective due diligence protects both the client's interests and those of financial stakeholders, such as banks, ensuring that all parties are aware of and can appropriately address potential environmental and business-related risks.

This refined explanation provides a structured overview that emphasizes the differences and implications of RECs and BERs within the scope of environmental due diligence.

 

For more insights into our Environmental and Industrial Hygiene Services, or to discuss your specific needs, please contact me directly at gene@balanceconsultinginc.com.