If performing due diligence for a commercial project site is analogous to preparing for take-off, then the Environmental Site Assessment (ESA) is part of the aircraft check that gives the green light to fly.
An ESA’s purpose is to identify potential contamination in the soil and groundwater before purchasing the land. Its findings can either save or destroy a website.
When a loan is financed through Freddie Mac or Fannie Mae, as well as most other lenders or private investors, an ESA must be completed. However, regardless of loan type, ordering one is a best practice method and a good insurance policy against previously unknown environmental conditions that may not be visibly present.
Here is why.
Phase 1
A visual and historical inspection is performed during Phase 1 (Environmental Study) to identify any potential current or past environmental issues. This report’s findings can significantly reduce the property’s value or even limit its intended use.
Why?
This assessment provides significant value to the potential buyer, including liability protection under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and “site operator” (tenant) liabilities. In short, if contamination is present and you acquired the property without being aware, it becomes your responsibility.
Although risk tolerance varies from buyer to buyer, you should weigh the assessment fee against the possibility of discovering an environmental issue that reduces the property’s value later. The report will also inform you of any new regulations that may affect the site. In most jurisdictions, the current buyer is liable for any contamination, even if they did not cause it.
Working with a commercial real estate developer protects against being caught off guard and reduces the risk of surprises. Developers also conduct the assessment with accredited environmental engineering contacts with whom they already have trusting relationships.
Phase 2
If your project recommends Phase 2, additional subsurface environmental testing, sampling, and analysis will be required. The procedure will go much further than the standard Phase 1 report. The depth and scope of this section are determined by the findings of Phase 1 during the initial phase and can impact the timing, cost, and likelihood of project development.
It is critical to weigh the benefits and drawbacks of the fees incurred against the ultimate return on investment. Sometimes it’s better to avoid further losses, while it’s still worthwhile other times. Getting a second opinion is also beneficial opinion before proceeding with Phase 2.
Why?
The goal of such in-depth Phase 2 testing is to confirm the presence or absence of petroleum solvents or hazardous waste in the sites or existing buildings’ subsurface. It includes previous and adjacent uses dating back a century when environmental practices and laws were lax or non-existent.
As with Phase 1, it will provide information about new standards to be aware of, such as vapor intrusion or vapor encroachment, which can enter a new or existing building and cause future environmental concerns.
Consequently, one of the most valuable findings from this assessment is that it will go deeper to uncover any potential hazards from previous uses. Certain historical uses, such as dry cleaners or gas stations, pose greater contamination risks.
Example: Charter schools and daycare facilities where children are scheduled to occupy the space are at greater risk. It may even be necessary to prevent previous petrochemical or industrial solvent users from entering the building.
It is important to note that if Phase 2 identifies additional environmental concerns following testing, this does not eliminate the potential need for additional clean-up and processes required by state environmental agencies that regulate. If this is discovered, remediation costs will be high and time-consuming, taking years or even decades.
Case Study
For example, after identifying multiple recognized environmental conditions (RECs) on a brownfield subject property in Michigan in Phase 1, PM Environmental moved on to Phase 2. Samples were collected from the three buildings in the center, and the results confirmed that there would be unsafe health risks when buildings are not repaired properly. The contamination was found in the soil, groundwater, and gas.
Fortunately, the corrective action was eligible for brownfield incentives from the Environmental Protection Agency (EPA) and state programs. A major problem that could have resulted in increased liability was discovered early on.
When it comes to environmental investigation, it’s better to be safe than sorry when conducting thorough due diligence. Experts recommend at least two months to complete an ESA, which is not a long time considering your development’s long-term health.
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