When a potential purchaser is looking to acquire a commercial real estate asset some level of due diligence should be conducted to determine if any Recognized Environmental Conditions (RECs) exist.
There was a time when the be all and end all of environmental due diligence was the phase one Environmental Site Assessment (ESA). But, today, in many cases, the phase one report is just the beginning.
Phase one reports are designed to uncover (RECs) as defined by the American Society for Testing and Materials (ASTM). The standard was recently revised in 2013 and is now known as ASTM E1527-13. The new standard includes some new categories, most notably Vapor Encroachment (VE).
VE involves volatile chemicals in contaminated soil or groundwater migrating into structures and causing indoor air quality issues. The 2 biggest culprits for VE are gasoline stations and drycleaners that use perchloroethylene (perc). When adhering to ASTM E1527-13, consultants must now identify if this condition potentially exists when completing a phase one report.
So, what happens if a phase one report identifies one or more RECs? Typically a phase two scope is designed to address those “red flag” items. What does a phase two scope involve? Some questions that should be answered in a well thought out scope include:
- What equipment is appropriate?
- Is there adequate access?
- Is the site being redeveloped?
- Will urban fill material be disturbed?
- Are you seeking financing?
- Are there any regulatory hurdles to overcome such as a New York City E-designation on the property”?
A phase two report should make sure to cover not just soil, but groundwater as well (when accessible). How impacted soil and groundwater are addressed vary greatly in scope and cost. And, groundwater provides a pathway for contaminants to migrate off-site and is important to understand.
In many cases at the end of the phase two investigation the consultant can provide an estimate for any remedial efforts that may be required. Some refer to this remediation as phase three of environmental due diligence.
Phase 1 and 2 reports take time to complete. From the time a buyer hires a consultant until the laboratory data is reviewed after a phase 2 can take 2-6 weeks. While laboratories can provide results in as little as 24 hours, this kind of expedited service comes at a premium. Understanding the timeline related to these phases is important because it will impact contractual issues related to a sale and may require the buyer’s attorney seeking an extension from the seller in order to complete the recommended investigation.
Over time the lending community has gained a better understanding of the environmental component of due diligence. These phased reports provide lenders the comfort of having more data prior to making a loan. The data can be used to provide them with the ability to decline a loan and avoid inheriting a potential environmental issue. On the other hand the more data they are equipped with, the better the chance of an expedited approval
The objective of the environmental consultant hired for a real estate transaction comes down to answering a few questions: Is there a potential impact at the site, what will it cost to address, how long will it take and who is paying for the work. How many phases this takes depends on the property, its history and the history of the neighboring sites.