Environmental Site Assessment...

A Guide For Real Estate Investors

An environmental site assessment is something that you will eventually have to order if you plan on investing in commercial real estate. Not doing so will put you at a tremendous amount of financial risk. And although it is not necessary to become completely versed with respect to every detail of the process, it is at least advisable that you understand the overall process. What to expect in an environmental assessment report, what the difference is between a phase 1, 2 and 3 site assessment, how much the different phases cost etc., are all things you should at least be familiar with prior to entering into the process.

When I was in the midst of purchasing my first commercial property in 1995 (well over ten years ago now), the mortgage lender requested, as part of their lending package, that a Phase I environmental site assessment be performed on the property. Other than the obvious fact that the purpose of such an assessment would be to investigate the property for environmental contamination, I really was quite ignorant when it came to understanding how the process worked, what the report contained, and the implications of relying on the findings of the environmental consultant.

As I said, it was 1995. Environmental site assessments were are "fairly" new thing, and certainly there was not the intense focus on the subject as there is nowadays. Case in point, I recall ( in this article ) how relying on that first Phase 1 environmental site assessment almost cost me millions of dollars, ten years after the fact.

Steps Involved In An Environmental Site Assessment

The environmental site assessment process can be broken down into three "phases" as follows:

Phase I Environmental Site Assessment Or Phase I ESA

The "real" purpose of a phase I ESA is to determine whether or not it is necessary to conduct a phase II assessment. Let me explain. The first phase of a commercial property site assessment is strictly an information gathering procedure. No physical testing takes place during this stage of the process. If, based on the information that is gathered, the environmental consultant suspects that there is a risk that the property is contaminated (or could become contaminated) they will make a judgment call as to whether or not a phase II assessment should be undertaken. If a phase II assessment is required, it is during this stage of the process that physical samples are gathered and analyzed. (More on this below).

Keep in mind that as an acquirer of commercial property, it is unlikely that you will ever be required to order more than a phase I report. Why is this? Well, if the phase 1 assessment reveals that there are potential environmental contaminants existing on the site in question, it is likely that you will choose to walk from the deal. On the other hand, this could present an opportunity for an experienced real estate investor. If the property in question has some "potential" concerns ( such as the one-time presence of a dry cleaning drop-off/pick-up ) regarding environmental contamination, you can bet that the number of purchasers interested will be limited, therefore driving down the price. If you have the wherewithal to see the process through to the next step, you may end up with a deal on your hands if the concerns turn out to be nothing, or if the cost of remediation (clean up) of the problem is small. But again, tread carefully here.

And if you think this doesn't happen in "real life" then you may wish to read my report entitled: Environmental Site Assessment Case Study: A Tale Of Two Phase I's in which I walk through an actual phase I, phase II and related site remediation on one of my own properties.

Commercial real estate Phase I's can be ordered for several reasons, but for this discussion I will focus on a pre-acquisition assessment. The scope of the Phase 1 assessment will vary depending on the type of commercial property that is being examined. However, there are certain services that will typically be included when you hire an environmental consultant to prepare a phase I report. These can include (but are not limited to) the following:

  • site-inspection, including property improvements if any
  • interviews with past and present owners, property managers and on-site managers.
  • interviews with past and present owners of surrounding properties
  • interviews with local officials and agencies
  • review of historical data on the property
  • review of aerial photographs, both past and present
  • chain-of-title review
  • determine surrounding land use
  • review building and site plans
  • review topography, hydrology and geology of the area

Some of the things the consultant may be looking for include (but are not limited to):

  • UST's (underground storage tanks)
  • petroleum hydrocarbons (typically from leaking UST's)
  • asbestos
  • radon
  • lead (in paint or drinking water)
  • mold

In general you want to make sure that the phase I environmental site assessment meets two standards:

1. The pre-acquisition standards (also called "all appropriate inquiry - "AAI") set by the ASTM for phase 1 ESA's on commercial real estate.

2. It will "permit a user to satisfy one of the requirements to qualify for the innocent landowner, contiguous property owner, or bona fide prospective purchaser limitations on CERCLA liability" - ASTM.org (click for a full discussion of ASTM standards etc., opens a new window)

Once the consultant has gathered and processed the information they need, they will either declare in their final phase I environmental site assessment report that there is no reason to conduct a phase II assessment (ie. the site is, in their opinion, not contaminated) or, conversely, that there is potentially contaminates on the site and a phase II is recommended.

The cost for a phase I, in my experience, has been about $2,500 to $3,000. But I am sure this can vary depending on the type of property etc.

Phase II Environmental Site Assessment

If a phase II ESA is recommended, this is the stage of the process where physical samples and testing takes place. Depending on the type of concerns that arose during the phase I assessment, the environmental consultant will recommend appropriate sample gathering and testing procedure that will be undertaken in the phase II assessment. For a further discussion on phase II site assessments click here.

My only first hand experience with a phase II ESA came about during the sale of one of my properties. When I had purchased the commercial property I had a phase I report completed which did not recommend a phase II assessment. However, when the purchaser had a phase I done ten years later (and nothing significant had changed in those ten years) a phase II was recommended. I recount that story for you here to illustrate the subjective nature of phase I assessments.

As far as costs go, once you reach this phase of the process, it really depends on what type of "potential" contamination you are looking at, and the costs involved in gathering and analyzing the physical samples. The cost of the phase II that I mentioned above was in the $10,000 range, where the focus was on testing for the presence of petroleum hydrocarbons (from a leaking gas tank at an adjacent former gas station).

Phase III Environmental Site Assessment (Often Called Site Remediation )

I have never personally been involved in an environmental site remediation. However, an adjacent commercial property to one of my commercial buildings had to be remediated at one point in time. I relate the fallout from this in my environmental site assessment case study , and how it almost cost me millions of dollars . For an introductory discussion on environmental site remediation click here.

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