Due Diligence for Messy Commercial Property Purchases

As we continue our look at the legal environment for Oregon Real Estate we’re going to get a little messy and explore the due diligence recommended for buying property that may have environmental contamination. In the Sale and Purchase section of the Chambers Regional Real Estate Guide, I provide an overview of the common due diligence items that are important in any real estate transaction. Due diligence incorporates everything from financials and property inspection, to title and tax research. In most cases, another crucial due diligence item is environmental assessment of the property.

Oregon has historically faced a perpetual shortage of construction-ready commercial property available for development. This is leading more builders to consider giving the Fixer Upper treatment to environmentally contaminated sites (think abandoned eyesores, former dry cleaning facilities, shuttered gas stations, etc.). Commonly called “brownfields,” these parcels are often nicely sized, located in commercial zones, and worth the investment to clean up and redevelop. A quick search of the Environmental Cleanup Site Information database hosted by the Oregon Department of Environmental Quality (DEQ) returns 451 sites noted as former or current brownfields. There are thousands more under different contamination categories.

Whenever a property has a questionable environmental pedigree, an environmental site assessment is a must for buyers. However, an environmental assessment should be done in connection with the purchase of any commercial property. Some sites have known contamination, such as any property included on the DEQ database. Others don’t because they have been abandoned by their owners, have not been sold in decades, or were sold in private transactions. Another factor at play is that seller representations regarding compliance with environmental laws are not mandated in Oregon. But perhaps the most compelling reason for completing an environmental assessment is the fact that under both federal and Oregon law, a buyer of real property is potentially liable for environmental contamination as soon as they become owners of the property, regardless of when such contamination occurred or who caused it. Just the idea of being on the hook for thousands or millions of dollars in cleanup should outweigh any hesitation in investing in an environmental site assessment during the due diligence process.

I’ve seen many times how the results of an environmental assessment can rebalance negotiating power, affect the offering price, and help to properly allocate risk and liability for remediating environmental contamination in the purchase and sale agreement. For properties at a higher risk of contamination, it is becoming more common for buyers to mitigate risk by purchasing environmental liability insurance, with the seller paying at least a portion of the premium.

If your duly completed due diligence indicates that the property in your sights has confirmed or suspected environmental contamination, see if your project is eligible for federal, state, or local government assistance in the form of grants, loans, or technical support. A good place to start is Business Oregon, the Portland Brownfield Program, and the Oregon Health Authority Brownfield Initiative.

This article is Part 2 of our Oregon Real Estate Review Miniseries.