As the economy continues to strengthen due to lower unemployment rates and low inflation, development near and within major metropolitan areas is on the rise. In the past, young adults moved away from large cities to raise their families in the surrounding suburbs. However, there has recently been a shift in the residential preference back to urban communities. It follows that, with the influx of more people, the demand for residential housing has increased in many metropolitan cities. With the increase in population, the demand for commercial development has also increased in order to provide the goods and services required by the surrounding community. The scarcity of uncontaminated Greenfield properties and availability of attractive State and Federal grants has helped shift much of the new redevelopment activity towards Brownfield sites located within inner cities. For decades these sites were left abandoned and in a state of disrepair, but now due to increasing property values, are once again being brought back into reuse.
Acquiring historically commercial and industrial property can be a risky proposition due to unknowns such as contaminated soil and groundwater, which may be present beneath the property, and hazardous building materials, which may be present within structures on the property. Potential environmental regulatory compliance obligations, elevated construction and renovation budgets, and business liabilities all need to be understood and accounted for in deal structures, often within brief due diligence periods.
However, this risk can be managed by retaining the services of a qualified environmental consulting company to investigate and, if necessary, characterize the property prior to purchasing, leasing, or developing. There are several steps that should be followed in order to manage the risks.
Step 1 – Phase I Environmental Site Assessment (ESA)
The first and most important step in managing the risk is to complete a Phase I Environmental Site Assessment (Phase I ESA) of the property to identify any Recognized Environmental Conditions (RECs) that are present. The industry best practice for completing a Phase I ESA is to follow the American Society for Testing and Materials (ASTM) E1527-13 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process along with the United States Environmental Protection Agency (USEPA) 40 CFR §312 All Appropriate Inquiries (AAI) Rule as amended on December 30, 2013 such that the future property owner or lessee qualifies for certain landowner liability protections under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Specific lenders may have additional requirements beyond those specified in the ASTM and AAI guidelines.
The scope of a typical Phase I ESA includes a review of local, State and Federal records, title information, and historical documentation, including but not limited to, aerials photographs, land use maps, fire insurance maps, and street directories. In addition, a site inspection of the property and interviews with owners, occupants, neighbors and local government officials is also conducted. The results of the document reviews, interviews and inspection are summarized in a final report.
Step 2 – Hazardous Building Materials Survey
If a building is present at the property, a hazardous building materials survey should be performed for the purpose of identifying asbestos, lead-based paint, polychlorinated biphenyl (PCB) and mercury containing equipment, along with refrigerants, ozone-depleting substances and other hazardous wastes that would require abatement or encapsulation prior to building demolition or renovation. The existence of many of these materials are typically not known until samples are collected and laboratory analysis is performed. This survey can be done concurrently with the Phase I ESA if the timing of the real estate transaction is short. Based on the findings, the environmental consultant will be able to provide an opinion as to likely renovation and demolition costs.
Step 3 – Phase II Site Characterization
If during completion of the Phase I ESA, RECs are identified indicating there is a potential for impacted soil or groundwater to be present at the property, a Phase II Environmental Site Assessment (Phase II ESA) would be the next step. Soil, groundwater, soil vapor, and possibly indoor air samples would be collected as part of the Phase II ESA to identify impacts and potential routes of exposure. Depending on the type of development and concentrations, some contaminants can be managed on site as long as there are engineering controls such as soil caps and vapor mitigation systems and/or institutional controls such as deed restrictions in place to interrupt potential direct contact with the impacted media. If remediation is required, depending on the extent and type of contaminants, significant delays in the construction schedule or significant increases in construction costs can be recognized. That is why it is imperative that the scope of the Phase II ESA be comprehensive enough to identify environmental impacts at the property prior to either purchase of the property or initiation of construction and redevelopment activities.
Step 4 – Remediation and Regulatory Approval for Closure
If determined to be necessary by the Phase II investigations, remedial actions may be required, as dictated by the future use of the property and regulatory framework. Each state has a different regulatory structure related to environmental contamination. Some have prescriptive cleanup requirements that must be followed while some have what are termed “Voluntary Cleanup Programs” that are not mandatory but offer closure certification that can be desirable for many purchasers and lenders. Depending on concentrations of specific contaminants identified on the site and the type of media impacted, remedial activities can include but are not limited to soil capping, monitored natural attenuation, in-situ soil and groundwater treatment and ex-situ soil and groundwater treatment. Although these activities are not often conducted during a real estate transaction, anticipating the likely costs, schedule, and impacts to the proposed use of the property is a necessary component of a successful deal. Once the property is purchased, the identified issues must be appropriately managed in accordance with regulatory and business requirements. This would also include the management of hazardous building materials identified under Step 2 which would require abatement prior to building renovation or demolition.
The characterization data collected as part of the Phase II should be used to conduct a remedial alternative analysis. This would identify the best remedy for the site taking into consideration the remedial cost, the timetable to remediate, and protecting human health. The environmental consultant selected to conduct this evaluation should be well versed in the specific regulations in which the site is located and staff members should possess any necessary certifications or licenses that would be required under the regulations to obtain state closure. Upon completion of the remedial activities, a final report following the requirements of the regulatory agency in which the site is located should be prepared such that closure can be obtained.
Although it is not a requirement that the same environmental consultant conduct all phases of the environmental assessment, there are many advantages to having one firm involved in all aspects of the project. The most notable advantage is the recognition of potential cost savings associated with having a single entity conduct various investigations concurrently. In addition, it is critical that the consultant have a full understanding of the development plans and project schedule prior to initiation of the Phase I ESA. Experienced environmental consultants know how to anticipate stakeholder needs and appropriately communicate potential risks with lenders, regulators, attorneys, design engineers, and other consultants. The earlier that environmental risks are considered and addressed during the property acquisition and development process, the greater the chance for successful transaction.