The Role of Environmental Regulations in Real Estate Investments

By Michael J. “Mick” McGirr |  Phocus Law

Sometimes, dealing with the laws and regulations surrounding environmental regulations can get frustrating, especially when they start to affect your investments. This is nowhere more apparent than here in Arizona, where it takes careful utilization of resources to keep over seven million people alive in such a beautiful, but sometimes inhospitable, place.

Environmental regulations in real estate exist to prevent the possible contamination, destruction, or misuse of natural resources. This applies to the way you use the piece of property you own, as well as the effect on the private property of others. These potential threats are regulated by the Environmental Protection Agency (EPA) and the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, as well as by other state and municipal agencies and laws.

In real estate investing, the biggest environmental issues center around a few key concerns. One is relatively obvious: water usage. In a place like Arizona, it’s a big deal, and how the area you are trying to develop gets its water can make the difference between having a successful investment, or not. For instance, approval for residential communities that rely on pumping groundwater was paused last year by Governor Katie Hobbs. If you happen to try and develop a property that requires the use of groundwater, you may want to reconsider until the pause is lifted. 

Another concern is ground contamination, either from your actions in developing the area or from the residual effects of the previous owner. This might be from waste leaking into the soil, failure to replace old, outdated plumbing, or other forms of contamination. While the environmental effects can be harmful to the investor personally, it will likely be overshadowed by the high cost of cleaning up the mess, whether you made it or not. When looking into buying a property, but most especially when considering a higher-risk commercial property, consider having an Environmental Site Assessment (ESA) done on the property. These professional inspectors will make sure that there are no surprises, especially in the case of a brownfield, or previously developed property, where outdated and possibly environmentally dangerous structures or activities could have polluted the area before your ownership.

In planning to develop a property, you should exercise a concept called Environmental Due Diligence. In a nutshell, this means making sure that your real estate investment, whether residential, industrial, or otherwise, is environmentally friendly enough to be accepted by investors. Often, the form that environmental regulation can take can become political and even heated, so making sure that you know your investors and the proper way to address their concerns is critical.

If you do find an issue and need to inform your investors, focus on resolving the environmental concerns head-on rather than sidestepping them. Investors are not necessarily concerned about the existence of an environmental issue, but instead about how that will affect their personal liability. Due to the highly publicized environmental crises of the past few decades, people are increasingly wary of taking part in environmentally hazardous business opportunities. If you are unsure of how a property has been affected by an environmental issue even after going through the due diligence process, you may consider buying insurance that covers environmental damage liabilities.

Facing environmental regulation can be daunting, but if you would like some help with making sure you successfully navigate these regulations, the law professionals at Phocus Law are always willing to assist. Give Phocus Law a call to set an appointment to discuss at 602-457-2191 or reach out via email at [email protected].