Commercial environmental due diligence in Maryland can be one of the most important investigations a buyer performs before acquiring commercial real estate.

Environmental problems are not always visible during a property showing or building inspection.

A property may look perfectly usable while historical activities on the site or surrounding properties raise questions about soil, groundwater, petroleum products or hazardous substances.

Depending on the transaction, environmental due diligence may include a Phase I Environmental Site Assessment (ESA), additional testing, review of government records and consultation with environmental and legal professionals.

What Is Environmental Due Diligence?

Environmental due diligence is the process of investigating environmental conditions and potential environmental risks associated with real estate.

Depending on the property and transaction, the investigation may consider:

• Current property use
• Historical property uses
• Adjoining property uses
• Government environmental records
• Petroleum storage
• Hazardous substances
• Known releases
• Prior cleanup activities
• Soil or groundwater concerns
• Other environmental conditions

Why Environmental Due Diligence Matters

Environmental problems can affect much more than the physical condition of the property.

Potential impacts may include:

• Cleanup costs
• Financing difficulties
• Development limitations
• Construction delays
• Insurance concerns
• Property value
• Resale marketability
• Regulatory obligations
• Potential liability

What Is a Phase I Environmental Site Assessment?

A Phase I Environmental Site Assessment, commonly called a Phase I ESA, is a structured investigation of a property’s environmental condition and history.

The current ASTM E1527-21 standard is widely used for Phase I Environmental Site Assessments of commercial real estate.

A Phase I ESA is primarily designed to identify environmental conditions associated with the property through research, observation and professional evaluation.

What Does a Phase I ESA Typically Include?

A Phase I ESA generally involves several components.

Does a Phase I ESA Include Soil or Groundwater Testing?

Generally, a standard Phase I ESA is primarily an investigation involving records, historical research, interviews and site observations rather than physical sampling of soil or groundwater.

If the Phase I identifies conditions requiring further investigation, additional environmental testing may be considered.

What Is a Recognized Environmental Condition (REC)?

A major concept in a Phase I ESA is the Recognized Environmental Condition, commonly abbreviated REC.

ASTM E1527-21 establishes the technical framework environmental professionals use to evaluate and identify recognized environmental conditions in connection with commercial real estate.

Whether a particular condition constitutes a REC is a professional environmental determination based on the applicable standard and available information.

Historical Recognized Environmental Conditions

A property may also have environmental conditions associated with historical releases that were previously addressed.

The environmental professional evaluates the available information under the applicable ASTM standard and determines the appropriate classification.

Buyers should read the actual Phase I report carefully rather than focusing only on whether the report contains the word “REC.”

Controlled Recognized Environmental Conditions

Some environmental conditions may have been addressed while contamination remains subject to controls or restrictions.

For example, a property may have environmental conditions managed through engineering controls, institutional controls or land-use restrictions.

Those controls can remain important after the property changes ownership.

What Is a Phase II Environmental Site Assessment?

When environmental concerns require additional investigation, a Phase II Environmental Site Assessment may be appropriate.

Unlike a standard Phase I, a Phase II investigation may involve physical sampling and laboratory analysis.

Depending on the identified concern, testing could potentially involve:

• Soil
• Groundwater
• Soil vapor
• Other environmental media

The scope should be designed by qualified environmental professionals based on the specific property and conditions being investigated.

Phase I vs. Phase II Environmental Assessment

Does Every Commercial Property Need a Phase II?

No.

A Phase II is not automatically performed simply because a commercial property is being purchased.

Whether additional testing is appropriate depends on the findings of the environmental investigation, the property, lender requirements, intended use and advice of the environmental and legal professionals involved.

What Are “All Appropriate Inquiries”?

Federal environmental law includes a process known as All Appropriate Inquiries, or AAI.

The U.S. Environmental Protection Agency describes AAI as the process of evaluating a property’s environmental conditions and assessing potential liability for contamination.

The EPA recognizes ASTM E1527-21 as a standard that can be used to satisfy the AAI requirements for commercial real estate.

Why AAI Matters to Commercial Buyers

All Appropriate Inquiries can be an important component of qualifying for certain federal landowner liability protections under CERCLA.

These protections may include, depending on the circumstances:

• Innocent landowner protection
• Contiguous property owner protection
• Bona fide prospective purchaser protection

Each protection has specific legal requirements.

What Is a Bona Fide Prospective Purchaser?

Federal law provides a framework under which a qualifying buyer may potentially acquire contaminated property while obtaining certain protection from CERCLA liability.

This is commonly referred to as Bona Fide Prospective Purchaser (BFPP) status.

EPA explains that qualifying for and maintaining BFPP status involves several requirements, including conducting All Appropriate Inquiries before acquisition and satisfying applicable continuing obligations.

Buyers considering contaminated property should obtain qualified environmental and legal advice concerning these requirements.

Environmental Due Diligence Should Happen Before Acquisition

Timing is critical.

A buyer seeking certain federal landowner liability protections generally cannot simply purchase the property first and perform the required inquiry later.

EPA states that All Appropriate Inquiries must be performed before acquiring the property for the applicable landowner liability protections.

How Long Is a Phase I ESA Good For?

Environmental due diligence has timing requirements.

For transactions relying on All Appropriate Inquiries, buyers should verify that the Phase I and its required components satisfy the applicable federal timing requirements as of the acquisition date.

If an existing Phase I report is being provided by a seller, do not automatically assume it can simply be reused without review or updating.

The buyer should have the environmental professional and legal counsel confirm whether the report remains suitable for the buyer’s transaction and intended purpose.

Who Should Order the Phase I?

The buyer should pay attention to who is identified as the user of the environmental assessment.

A Phase I previously prepared for a seller, lender or prior buyer should not automatically be treated as equivalent to a report prepared for or properly relied upon by the current buyer.

Reliance rights, report age, updates and AAI requirements should be discussed with the environmental consultant and legal counsel.

Environmental Risks Associated With Former Property Uses

Historical use can provide important clues about potential environmental risk.

Examples of property uses that may deserve closer investigation include:

• Gas stations
• Automotive repair facilities
• Dry cleaners
• Manufacturing facilities
• Industrial properties
• Printing operations
• Metalworking facilities
• Waste handling facilities
• Certain warehouses
• Fuel storage facilities

Gas Stations and Environmental Due Diligence

Gas stations deserve particular environmental attention because of their association with petroleum storage and underground storage tanks.

A buyer evaluating an operating or former gas station may need to investigate:

• Current underground storage tanks
• Former tanks
• Tank removal records
• Leak or release history
• Environmental investigations
• Soil and groundwater conditions
• Remediation history
• Regulatory status
• Closure documentation

Underground Storage Tanks in Maryland

The Maryland Department of the Environment’s Oil Control Program regulates oil-related activities, including underground and aboveground oil storage facilities.

MDE requires regulated underground storage tanks to be registered and establishes requirements involving tank installation, operation, maintenance, inspection and removal.

The presence of a tank does not automatically establish contamination, but it is information a commercial buyer should investigate.

What If an Underground Tank Was Removed?

A statement that an underground storage tank was removed should lead to additional questions rather than ending the investigation.

A buyer may want to determine:

• When was the tank removed?
• Who removed it?
• Was the work properly documented?
• Were soil samples collected?
• Was evidence of a release identified?
• Was remediation required?
• Was the matter closed by the appropriate regulatory agency?
• Are supporting reports available?

Aboveground Storage Tanks

Commercial and industrial properties may also contain aboveground storage tanks.

Maryland’s Oil Control Program regulates certain aboveground oil storage facilities and establishes requirements depending on the type and capacity of the facility.

Buyers should investigate current tanks, historical tanks, permits, spill history and compliance information when relevant to the property.

Dry Cleaners and Environmental Risk

Former or current dry-cleaning operations can warrant additional environmental attention because of the chemicals historically associated with some dry-cleaning processes.

A buyer should not assume that converting a former dry cleaner to another use eliminates environmental questions associated with the property’s historical operation.

Industrial and Manufacturing Properties

Industrial properties can have long and complicated operational histories.

Environmental due diligence may need to consider:

• Historical manufacturing processes
• Chemical storage
• Petroleum products
• Waste handling
• Floor drains
• Loading areas
• Storage tanks
• Prior spills
• Historical disposal practices
• Regulatory records

Environmental Risk Can Come From Neighboring Property

Environmental investigation should not necessarily stop at the property line.

Activities on neighboring or nearby properties may be relevant to the environmental professional’s assessment.

Examples might include:

• Adjacent gas stations
• Former industrial facilities
• Dry cleaners
• Waste facilities
• Known release sites
• Other properties with environmental concerns

Maryland Environmental Records

Environmental due diligence may involve reviewing records maintained by the Maryland Department of the Environment and other governmental agencies.

Depending on the property, records may provide information concerning:

• Known contaminated sites
• Cleanup activities
• Underground storage tanks
• Oil releases
• Hazardous substances
• Environmental enforcement
• Voluntary cleanup activities
• Other environmental matters

MDE also provides a process for requesting records for environmental site assessments and other due-diligence reviews.

Maryland’s Voluntary Cleanup Program

Maryland operates a Voluntary Cleanup Program (VCP) through the Maryland Department of the Environment.

The program was established to provide state oversight for the voluntary cleanup of qualifying properties contaminated with hazardous substances.

Its purpose includes facilitating cleanup and redevelopment while providing a structured process for addressing environmental conditions.

What Is a Brownfield?

The term brownfield generally refers to property where redevelopment or reuse may be complicated by actual or potential environmental contamination.

Brownfields can include former:

• Industrial properties
• Manufacturing facilities
• Gas stations
• Commercial sites
• Warehouses
• Other previously developed properties

A brownfield is not necessarily a property that should never be purchased. Many contaminated or potentially contaminated properties can be investigated, cleaned and returned to productive use.

Maryland Brownfield Redevelopment

Maryland has programs designed to encourage the cleanup and redevelopment of qualifying contaminated or underutilized properties.

MDE’s Voluntary Cleanup Program provides a structured environmental cleanup process, while Maryland’s Brownfields Revitalization Incentive Program may provide qualifying projects with certain financial incentives.

No Further Requirements Determination

For qualifying properties participating in Maryland’s Voluntary Cleanup Program, MDE may issue a No Further Requirements Determination when applicable program requirements are satisfied.

The actual document, conditions and property-specific requirements should be reviewed carefully rather than relying solely on a seller’s statement that the property has been “cleared.”

Certificate of Completion

Maryland’s Voluntary Cleanup Program may also involve a Certificate of Completion following completion of an approved response action and applicable program requirements.

Buyers evaluating VCP properties should review the actual MDE documentation and any conditions, restrictions or continuing obligations affecting the site.

Land-Use Restrictions and Environmental Controls

Some remediated properties may remain subject to restrictions or controls.

Depending on the property, those controls could affect:

• Permitted future uses
• Residential conversion
• Excavation
• Groundwater use
• Construction
• Soil disturbance
• Maintenance of environmental controls

Environmental Due Diligence and Zoning Are Different

A property can be properly zoned for a buyer’s intended business and still have environmental concerns.

Likewise, satisfactory environmental findings do not establish that the intended use is permitted by zoning.

Environmental Assessment vs. Property Inspection

These are also separate due-diligence investigations.

A commercial property inspection may evaluate:

• Roof
• Structure
• HVAC
• Electrical systems
• Plumbing
• Building envelope

A Phase I ESA focuses on environmental conditions and historical property use within its applicable scope.

Environmental Due Diligence and Commercial Financing

Commercial lenders may require environmental due diligence as part of their underwriting process.

The lender may have requirements concerning:

• Type of environmental report
• Environmental consultant qualifications
• Age of the report
• Reliance language
• Identified environmental conditions
• Additional testing
• Remediation

A buyer financing commercial real estate should coordinate environmental requirements with the lender early in the transaction.

Environmental Problems Can Affect Property Value

Environmental conditions can influence the economics of a commercial acquisition.

Potential effects can include:

• Remediation expenses
• Environmental monitoring costs
• Reduced development potential
• Use restrictions
• Financing limitations
• Higher professional costs
• Delayed construction
• Resale concerns

The impact depends on the specific property and environmental condition.

What Happens If the Phase I Identifies a Problem?

Finding an environmental concern does not automatically determine what the buyer should do.

Depending on the purchase agreement and circumstances, possible next steps could include:

• Additional investigation
• Phase II testing
• Obtaining additional records
• Environmental legal review
• Obtaining remediation estimates
• Negotiating with the seller
• Requiring specified seller action
• Restructuring the transaction
• Evaluating available environmental programs
• Terminating the transaction if permitted by the contract

Environmental Due Diligence and the Purchase Agreement

The commercial purchase agreement should provide sufficient opportunity for the buyer to perform the investigations appropriate for the property.

Depending on the transaction, environmental provisions may address:

• Access to the property
• Environmental inspections
• Testing
• Seller records
• Restoration following testing
• Due-diligence deadlines
• Termination rights
• Confidentiality
• Indemnification related to invasive testing

The actual contract controls the buyer’s rights.

Environmental Due Diligence for Commercial Tenants

Environmental risk is not exclusively a purchase issue.

Certain commercial tenants may also need to consider environmental conditions, particularly when leasing:

• Industrial facilities
• Automotive properties
• Manufacturing facilities
• Fuel-related properties
• Warehouses involving regulated materials
• Properties with known environmental history

Lease provisions may allocate responsibilities involving hazardous materials, environmental compliance, spills, remediation and indemnification.

Environmental Provisions in Commercial Leases

Depending on the property and business, a commercial lease may address:

• Hazardous materials
• Permitted substances
• Environmental compliance
• Storage and disposal
• Spill reporting
• Remediation responsibilities
• Inspection rights
• Environmental indemnification
• Conditions existing before the lease
• Conditions caused during the lease

Environmental Due Diligence for Industrial Buyers

Industrial acquisitions frequently deserve particularly careful environmental review because historical operations may have involved petroleum products, chemicals, manufacturing processes or waste.

Buyers should provide the environmental professional with as much relevant information as possible concerning the proposed transaction and intended property use.

Environmental Due Diligence for Redevelopment

Environmental conditions can become particularly important when a buyer plans to disturb soil or substantially redevelop a site.

A property that functions adequately in its existing condition may present different environmental considerations when the buyer plans:

• Excavation
• Demolition
• New foundations
• Utility installation
• Stormwater work
• Major grading
• Residential conversion

Environmental consultants should understand the buyer’s intended redevelopment plans when evaluating the property.

Commercial Environmental Due Diligence Checklist

Common Environmental Due Diligence Mistakes

• Assuming a clean-looking property has no environmental risk.
• Looking only at the property’s current use.
• Ignoring neighboring properties.
• Assuming a normal building inspection includes a Phase I ESA.
• Waiting until the end of due diligence to order the Phase I.
• Assuming an old seller-provided Phase I automatically satisfies the buyer’s needs.
• Ignoring a former underground storage tank because it was removed.
• Assuming remediation means no restrictions remain.
• Failing to review actual MDE documentation.
• Ignoring environmental requirements imposed by the lender.
• Assuming a REC automatically means the deal should be terminated.
• Performing environmental due diligence only after purchasing the property.

Commercial Environmental Due Diligence FAQs

This article is provided for general informational and educational purposes only and does not constitute environmental, legal, engineering, financial, tax or investment advice. Environmental conditions, regulatory requirements, liability protections and cleanup obligations vary by property and circumstances. Commercial buyers, sellers, owners and tenants should consult qualified environmental professionals, attorneys, lenders and appropriate government agencies concerning a specific property or transaction.