If performing the due diligence for a commercial project site is like preparing for take-off, then the Environmental Site Assessment (ESA) would be part of the aircraft check that grants the green light to fly.
The purpose of an ESA is to identify any potential contamination in the soil and groundwater before you commit to buying the land. Its findings can either keep or kill a site.
>>LEARN MORE ABOUT HOW ENVIRONMENTAL ASSESSMENTS FIT INTO THE COMMERCIAL DEVELOPMENT PROCESS
It’s required to complete an ESA when a loan is financed through Freddie Mac or Fannie Mae, along with most other lenders or private investors. But regardless of loan type, taking the safety measure of ordering one is a best practice method and a good insurance policy against past unknown environmental conditions that may not be visibly present.
Here’s why.
During Phase I (Environmental Study), a visual and historical inspection is performed to identify any potential current or past environmental issues. The findings in this report have the potential to hinder the property’s value significantly or even limit its intended use.
This assessment offers much value to the potential buyer, including protection against both Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and “site operator” (tenant) liabilities. In short, if there’s contamination present and you acquired the property without knowing — it becomes your burden.
Although risk tolerance may vary from buyer to buyer, you should gauge the assessment fee against the consequence of discovering an environmental issue later that can decrease the property’s value. The report will also keep you up-to-date on new regulations that can affect the site down the line. In most jurisdictions, the liability of any contamination would be with the current buyer, even if they didn’t cause it.
Partnering with a commercial real estate developer helps guard against being blindsided and alleviates the risk should any surprises come up. Developers also use accredited environmental engineering contacts they already have trusting relationships with to conduct the assessment.
If your project ends up recommending a Phase II, it will include additional subsurface environmental testing, sampling and analysis. The procedure will go well beyond what the standard Phase I report does. The depth and scope of this portion is dependent upon the Phase I findings during the initial phase and can affect a project’s timing, cost and likelihood of being developed.
Note: It’s important to weigh out the pros and cons of the fees that will be incurred with the ultimate return on investment. Sometimes it’s better to cut your losses early, while other times it may still be worth it. Also, it doesn’t hurt to get a second opinion before jumping into a Phase II.
The purpose of conducting such an in-depth level of Phase II testing is to confirm the presence, or absence of, petroleum solvents or hazardous waste in the subsurface of the site or existing building. This encompasses previous and neighboring uses, ranging back sometime more than a century ago when environmental practices and laws were very lapse or non-stringent.
Like Phase I, it will provide knowledge of new standards to be aware of, such as vapor intrusion or vapor encroachment that can potentially enter a new or existing building posing future environmental concerns.
So, perhaps one of the most valuable findings from this assessment would be that it will dig deeper to uncover any potential dangers from former uses. Certain historical uses such as a dry cleaner or gas station present higher risks of contamination.
Example: Charter schools and day care users where children are planned to occupy the space face greater risks. It may even require mitigation against past petrochemical or industrial solvent users from entering the building.
It’s important to note that if a Phase II identifies additional environmental concerns after testing, this does not solve the potential need for further clean up and processes needed by state environmental agencies that regulate. If this is discovered, then remediation costs will be hefty and time-consuming, requiring years or even decades.
For example, a brownfield subject property in Michigan had multiple recognized environmental conditions (RECs) identified in Phase I, so PM Environmental proceeded to perform Phase II. Samples of the 3-building center were taken, and sure enough — the results proved that unsafe health risks would be present in the buildings if not remediated properly. The contamination was located within the soil gas and groundwater.
Fortunately, the corrective action was eligible to receive Environmental Protection Agency (EPA) brownfield incentives and state programs. Most importantly, a major issue that would have caused a greater liability down the line was found early.
When it comes to completing a thorough due diligence, it’s better to be safe than sorry when it comes to environmental investigation. Experts recommend a time frame of at least two months to complete an ESA, which is not a long time when you think about the long-term health of your development.