Understanding the environmental state of a property and its land before acquiring, selling, or developing on it, is key. But how do you go about finding out potential issues? The answer lies in conducting an environmental site assessment (ESA), which usually takes place during the property due diligence process.
In this guide, we delve into the importance of ESAs in the realm of commercial real estate (CRE). Read on to learn how they work and why you might need one.
Understanding Environmental Site Assessments
Environmental site assessments are reports with information about a property’s potential or current environmental risks. Such risks can impact the property’s value and the health of its occupants. For this reason, an ESA is done before buying or leasing a property.
An ESA typically covers the land under the property, plus any physical improvements to that property. It helps to uncover any previous or current environmental issues that exist on the site.
For CRE professionals, conducting an ESA before finalizing a transaction is an important step. The insights it offers into various potential risks are extremely valuable. Thus, it’s a useful risk management tool and can be used to make informed decisions.
An ESA plays a multifaceted role in any CRE transaction. It assists in securing financing in the following ways:
- Helping lenders to fully understand potential environmental risks
- Ensuring adherence to regulations
- Safeguarding against unforeseen liabilities that might arise after the transaction is completed
Not conducting an ESA means you’re neglecting potentially serious environmental risks. The consequences for lenders and property owners can be severe, including:
- Legal ramifications
- Financial burdens from cleanup costs
- Lower property values
- Difficulty in obtaining financing or insurance
Assessing the Environmental Risks
The research conducted during an ESA involves several factors, including:
- The property's history
- Adjacent land uses
- Potential contaminating operations
A qualified environmental professional (EP) carries out this research and/or oversees a Phase 1 environmental site assessment. An EP must have the knowledge and experience to use professional judgment and assess risks appropriately.
Certain industries are commonly recognized as having higher environmental risks, such as:
- Gas stations
- Dry cleaners
- Auto/vehicle repair shops
- Manufacturing facilities
- Printing operations
These businesses often use or produce substances that can lead to soil or groundwater contamination. Contamination can pose significant risks to the property and its surroundings.
Soil vapor contamination is a specific concern for EPs. Contaminants in soil vapor can migrate through the soil and affect indoor air quality. This could impact the health of occupants in buildings constructed on the site. While chemical vapors tend to be low in concentration, in some cases they can build up to dangerous levels. As a result, explosions or even acute health issues can occur. Even low concentrations can cause chronic health issues.
Types of Environmental Site Assessments
Phase 1 Environmental Site Assessments
A Phase 1 ESA is a comprehensive study to evaluate the environmental condition of a property. Phase 1 ESAs can be done on any site, whether it’s vacant land, farmland, multifamily residential, commercial, or industrial.
Following the standards established by ASTM E1527-13, a Phase 1 ESA involves the following:
- Thorough investigation to assess the historical usage of the property and neighboring sites
- Reviewing historical records and government databases
- Conducting interviews with past and current owners or occupants
- On-site inspections to detect any potential hazardous materials, contaminants, or recognized environmental conditions
This assessment provides vital information to reduce risks and ensure compliance with environmental regulations. Ultimately, it safeguards both buyers and lenders from unforeseen liabilities.
Phase 1 ESAs are an integral part of the property and land acquisition due diligence process. The data collected during the Phase 1 ESA process will enable you to make a better decision by:
- Estimating the value of the land more accurately
- Being more aware of potential risks and hazards
- Protecting you from liability if the land is bought without any Phase 1 ESA
If you buy the land without doing a Phase 1 ESA, you are liable for any contamination that may occur. This could cost you millions. Worse, the land may not be suitable for your project. Financial institutions are also protected by Phase 1 ESAs. If a buyer defaults on the loan, a Phase 1 ESA can help recover the losses.
Phase 2 Environmental Site Assessments
After a Phase 1 ESA has identified potential risks, a Phase 2 assessment comes into play. This stage involves further investigation through sampling and testing to confirm the extent of contamination. It's usually necessary when the Phase 1 assessment flags potential risks or historical uses of the property that might have caused contamination. The ASTM E1527-13 standard serves as a guideline for conducting Phase 2 ESAs. It outlines specific criteria and procedures to investigate hazardous substances.
The scope of work is much broader than the number of specimens taken. Factors such as the appropriate drilling and sampling methods for the site are important. As are the types of contaminants.
Components of a Phase 2 ESA to determine the extent and nature of any contamination involve:
- On-site sampling
- Testing
- Analysis of soil, water, or air samples
Specialists use various techniques like drilling, excavation, or sampling to collect data. It is a comprehensive process, often requiring a variety of experts working together.
A Phase 2 ESA helps stakeholders make informed decisions about property transactions or development plans. At the same time, it prioritizes environmental safety and compliance with regulations.
Practical Examples of Environmental Site Assessments
Say, for example, you’re thinking of buying a former industrial site for redevelopment. A Phase 1 ESA helps uncover any existing contamination that might need to be cleaned up before repurposing the property. Similarly, during lease negotiations, an ESA can highlight potential issues for both landlords and tenants. This can impact lease terms.
Let’s look at a few practical examples of when ESAs are necessary and under what circumstances:
1. Property Transactions
Before buying or selling a property, an ESA is often required.
Potential buyers or lenders of industrial sites, commercial spaces, or vacant land may request an ESA. They use the ESA to identify existing or potential environmental liabilities. This assessment also helps to work out costs for cleanup or mitigation. If the ESA flags a major issue, they might pull out of the deal, or negotiate a lower purchase price.
2. Commercial Property Development
Before starting construction or development of a property or land, an ESA can identify any environmental issues such as:
- Soil contamination
- Presence of hazardous materials
- Endangered plant species’ habitats
You might need this information for obtaining permits, managing risks, and remediation planning.
3. Regulatory Compliance
Properties in industries like manufacturing, oil and gas, or chemical production are subject to various environmental regulations. ESAs ensure that these properties adhere to environmental standards. By doing so, they prevent potential legal issues or fines due to non-compliance.
4. Financial Transactions and Loans
Lenders often require ESAs as part of their due diligence process. Conducting an ESA helps lenders understand potential risks and liabilities of the property you want to get a loan for, which means that it can influence loan terms and conditions.
5. Property Management and Portfolio Assessment
Regular ESAs can form a part of a property’s ongoing management, to track environmental conditions over time. Conducting one periodically, helps to identify any new environmental risks or changes. Property owners can then take necessary actions to maintain compliance and reduce risk.
Final Thoughts on Environmental Site Assessments for CRE
It’s essential to know and understand the environmental state of a property before buying or selling. There can be serious repercussions if you ignore or underestimate the hazards highlighted in an ESA. The responsibility lies with you as a CRE professional to thoroughly assess and understand these risks. If you neglect environmental studies, it can have a negative impact on your long-term CRE success, and your bottom line.
After all, isn’t the aim of the game to make informed decisions that protect investments and the environment?
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