UNDERSTANDING ENVIRONMENTAL ISSUES IN COMMERCIAL REAL ESTATE

Environmental issues are a critical part of commercial real estate. While many properties have no significant problems, buyers and investors should always understand the potential risks associated with a site’s history, location, and prior use.

Environmental concerns can play a major role in commercial real estate transactions. Whether buying, selling, financing, or developing a property, environmental issues have the potential to delay deals, reduce property value, increase liability, and create unexpected costs for owners and investors.

Many buyers focus on location, building condition, and financial performance — all important factors — but overlooking environmental concerns can become a costly mistake. In some cases, environmental cleanup obligations can reach hundreds of thousands or even millions of dollars.

Understanding the basics of environmental due diligence can help buyers, sellers, landlords, and investors protect themselves and make more informed decisions.

Why Environmental Issues Matter! Unlike many other property concerns, environmental liability can sometimes extend to current property owners even if they did not cause the contamination.

In some situations:

A buyer can inherit environmental liability from a previous owner
Lenders may refuse financing
Insurance companies may limit coverage
Development plans may become restricted
Property values may decline significantly

Environmental concerns can affect:

Industrial properties
Gas stations
Agricultural land
Warehouses
Manufacturing facilities
Dry cleaners
Auto repair businesses
Older commercial buildings
Even some retail or office sites

Common Environmental Concerns in Commercial Real Estate:

Underground Storage Tanks (USTs): One of the most common environmental risks involves underground storage tanks, particularly older fuel tanks.

Problems may arise from:

Leaking gasoline or diesel fuel
Corrosion
Improper abandonment
Unknown tank locations

Former gas stations, trucking facilities, farms, and industrial sites often present elevated risk. Even if a tank was removed years ago, contamination may still remain in the soil or groundwater.

Soil and Groundwater Contamination: Commercial and industrial activities may leave behind contamination from:

Petroleum products
Solvents
Chemicals
Heavy metals
Industrial waste
Agricultural chemicals

Contamination can migrate underground and affect neighboring properties or water supplies.

Cleanup costs can be substantial depending on:

Severity
Depth
Groundwater involvement
Regulatory requirements

Asbestos: Asbestos was commonly used in building materials before the 1980s.

It may be found in:

Insulation
Floor tile
Pipe wrapping
Ceiling materials
Roofing products

Asbestos is not always dangerous if left undisturbed, but renovation or demolition can trigger costly abatement requirements. Buyers of older commercial buildings should be aware of the potential for asbestos-containing materials.

Lead-Based Paint: Buildings constructed before 1978 may contain lead-based paint. While often more associated with residential properties, lead concerns can still arise in commercial or mixed-use buildings.

Lead hazards become more significant during:

Renovation
Sanding
Demolition
Tenant improvements

Mold and Moisture Issues: Water intrusion can lead to mold growth and indoor air quality concerns.

Common causes include:

Roof leaks
Poor drainage
Plumbing failures
HVAC issues
Flooding

Mold problems may:

Affect tenants
Lead to health complaints
Increase maintenance costs
Reduce occupancy

Wetlands and Floodplains: Environmental issues are not always contamination-related. Wetlands and floodplain restrictions can significantly impact:

Development potential
Site planning
Stormwater management
Building placement

Properties near rivers, lakes, or low-lying areas may require additional permitting and engineering work. In Wisconsin and many other states, wetland regulations can heavily influence the usability and value of commercial land.

Phase I Environmental Site Assessments:

One of the most important tools in commercial real estate due diligence is the Phase I Environmental Site Assessment, commonly called a “Phase I ESA.”

A Phase I typically includes:

Historical property research
A site inspection
Review of government databases
Aerial photo analysis
Interviews and records review

The purpose is to identify “Recognized Environmental Conditions” (RECs) that may indicate contamination risk. Lenders frequently require a Phase I before approving financing on commercial properties.

What Happens if Problems Are Found? If the Phase I identifies potential concerns, additional investigation may be recommended.

This may include:

Soil testing
Groundwater sampling
Vapor intrusion testing
Tank locating
A Phase II Environmental Assessment

A Phase II involves actual sampling and laboratory analysis to determine whether contamination exists.

Environmental Issues and Financing: Environmental problems can complicate financing significantly.

Lenders may:

Delay approval
Require additional testing
Reduce loan amounts
Require cleanup
Decline financing altogether

Because lenders want to protect their collateral, environmental due diligence is often mandatory in commercial transactions.

Brownfield Redevelopment: Not all environmentally challenged properties are undesirable. Some contaminated or formerly industrial sites — known as “brownfields” — may qualify for:

Grants
Tax incentives
Redevelopment assistance
Liability protections

In some cases, buyers can acquire these properties at favorable pricing and create substantial value through redevelopment. Many communities encourage brownfield redevelopment to revitalize underused properties.

Seller Responsibilities: Sellers should understand that environmental issues can affect:

Marketability
Negotiations
Financing
Transaction timelines

Being proactive can help avoid surprises later in the transaction.

Some sellers choose to:

Obtain environmental reports before listing
Address known issues upfront
Maintain records of prior cleanup activities
Properly document tank removals and remediation

Environmental Due Diligence Is Essential: Environmental concerns should never be ignored simply because a property “looks clean.” Many environmental issues are invisible and may not become apparent until:

Financing begins
Inspections occur
Redevelopment is planned
Government records are reviewed

Proper due diligence can help buyers avoid major financial exposure and help sellers prepare properties for smoother transactions.

Final Thoughts: Environmental issues are a critical part of commercial real estate. While many properties have no significant problems, buyers and investors should always understand the potential risks associated with a site’s history, location, and prior use.

A careful environmental review can protect buyers, lenders, and sellers from unexpected liability while helping ensure a successful transaction.

Before purchasing or selling commercial property, investors should work with experienced professionals including:

Commercial real estate brokers
Environmental consultants
Attorneys
Lenders
Engineers

With proper due diligence and planning, environmental risks can often be identified early and managed effectively.

Questions? We can help! Contact Chris at 920-279-6104 or chris@cjmassociates.org