Real Estate Environmental Strategies

Date: 09/29/2015

A consultant, regulator, lender and broker walk into a studio. What comes out are proven environmental strategies to help you save money, make money and avoid losses associated with environmental issues.

START WITH PHASE ONE

The familiar Environmental Phase One Environmental Site Assessment (ESA), required by most lenders, has an ASTM-defined scope of work designed to determine if any hazardous substances or petroleum products may have ever affected the property. The consultant acts as a detective, looking for evidence of environmental hazards, especially things that need further investigation and testing. No actual testing is conducted in a Phase One. A site visit and inspection, evaluation of neighboring properties and file searches of public agency records regarding water quality and soil contamination form the bulk of the project. “Testing for mold, lead, radon and asbestos are not typically included in a Phase One study, but they might be noted as a potential problem. Buyers will want to contract for this additional research on a case by case basis,” Brawner advises, “and determine a budget for any necessary abatement.”

Cost and Duration

Expect a Phase One to take from two to four weeks.  Costs will vary with property type. As a benchmark, one-half acre in the greenbelt should cost from about $1,500 to $3,500. A large industrial site with a substantial history can run $5,000 to $15,000 and even higher. The final Phase One ESA report can be transferable in certain circumstances. It should have a 12-month shelf life, and in some instances can be updated within 18 months, even 24, depending on the property type. “Especially if nothing much was found,” notes Putnam, “it’s easy to recertify to a different lender.”

DO YOU NEED A PHASE TWO?

If Phase One determines a possibility of site contamination, then it’s time to conduct a Phase Two. There are several considerations at that point including;

1. Designing a suitable testing plan that balances risk tolerance and budget.
2. Conducting tests of the site and/or site perimeter if neighboring properties are an issue.
3. Having the report approved by an authorized groundwater professional.

“In Georgia, the state wants to see that a licensed geologist or engineer has conducted the ground water testing,” notes Wallace, “to guarantee proper samples were taken for accurate results.” Brawner described a typical Phase Two that includes soil and ground water testing. “We start with three solo borings in a triangle pattern at the upstream end of the water table. If that’s affected, you know there’s something above it.” The basic Phase Two should cost plus or minus $4,500 and take a few days, if the utilities cooperate. But that’s the basic test. If there is reason to suspect more contamination as revealed in the Phase One, the testing plan may be more elaborate and of course, more expensive.

Phase Two and the Lender

How do lenders view a Phase Two? Patrick Putnam described one situation where they were financing an office building and discovered that there once was an old battery manufacturing just up the hill. In this case there was no serious remediation required, but there were delays and costs involved doing the Phase 2. The borrower and lender are on the same side here. Both want the value of the property clearly understood.  “In a marginal deal, it might become a challenge,” he cautioned. If a deal falls through, can the next buyer use these reports? Brawner explained that a new buyer needs to have a contractual relationship with his firm in order for them to issue the liability insurance, errors & omissions on those reports.

Phase Two and the Regulators

When challenges are discovered in Phase 2, it’s time to deal with the regulators. How do you manage communication with them? “We rely on risk-based guidance,” explained Brawner. “Anything involving drinking water is a serious concern. If your gas station had a drinking water source or surface water body on property, it’s regulated more stringently.” Know the regulatory framework of your locale – some jurisdictions have county involvement.  Know who gives you the green light, and your testing and reporting can focus on satisfying their requirements. Some common situations involve old stations where tanks were removed years ago yet contamination is still detectable. Former dry cleaning sites often leave volatile organic compounds, mainly chlorinated solvents like PERC. These necessitate a review of potential water sources, plus a water-well and service water survey, an additional expense. These studies are individualized for the situation. Are you repurposing a gas station to a day care?  Redeveloping industrial land for residential? Expect the requirements for testing and remediation to be more stringent.

Opportunity Lurks

Is Air Quality the New Asbestos?

Air quality is increasingly important in environmental studies. The industry term is ‘vapor intrusion:’ the release of volatile chemicals to the subsurface that contaminates breathing air. These are new regulations, and regulators and consultants are still exploring how it impacts commercial real estate. “Twenty years ago asbestos was the end of the world,” said Wallace. “Now we have routine procedures for dealing with it.” So far, vapor intrusion hasn’t become a big crisis; most environmental work focuses on ground water contamination and soil contamination. And most of those issues involve petroleum products and are resolved by remediation. But in individual cases it’s very serious when volatile vapors follow utility trenches and make their way into a building. Old dry cleaning sites are the biggest source - those solvents can even come up through a slab. The best solution is a sub slab depressurization system that could mitigate both radon and vapors. Are we still testing for radon? Federal funded multifamily and senior facilities must be tested before occupancy. How big is mold? It was supposed to be the new asbestos, but if you’re a good landlord mold is not a big problem. Control water and moisture and you control mold.

What Buyers Should Know

• Know the regulatory framework of your locale – some jurisdictions have county involvement.  Check local regulations and the EPA and state agencies, and know who gives you the green light.
• Phase Ones are not required for cash buyers. But for liability and insurance purposes you will still need to know the prior uses, and what the adjacent land was used for. I recommend a phase One even if you are paying cash.
• Brownfield programs create a clean-hands transfer. Investigate what is available in your locale. These can include tax benefits and more.
• Don’t be afraid of remediation: An example – you can get access to state funding for cleaning out or removing underground tanks. Most states have trust funds for this purpose.
• An underground tank is not necessarily the property owner’s responsibility; it’s the tank owner. However, if the tank has been removed you are responsible for any lingering contamination.
• Hire an environmental consultant you can trust. They can assemble a dream team if you need one, such as a lender who’s familiar with industrial-to-residential projects, an attorney that’s worked in a specific brownfields program, and a broker to lease and sell it!