Friday, January 26, 2018

The ENVIRONMENT in which We Deal

Image Attribution: www.lancastercivil.com
One of the differences between a single family residential sale and a commercial sale is the requirement for an environmental report. Also known as a Phase I Assessment or an ESA, these beauties crept into our commercial real estate cribs in the mid 1980's.

According to our friends at Wikipedia, "...demand increased dramatically for this type of study in the 1980's following judicial decisions related to liability of property owners to effect site cleanup. Interpreting the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), the U.S. courts have held that a buyer, lessor, or lender may be held responsible for remediation of hazardous substance residues, even if a prior owner caused the contamination; performance of a Phase I Environmental Site Assessment, according to the courts’ reasoning, creates a safe harbor, known as the 'Innocent Landowner Defense'."

So now, an enviro assessment is a normal part of any due diligence and folds into most loan approvals. Rarely, will we encounter a Phase I in a lease transaction - although depending upon the size of the tenant, we've seen this as a requirement as well. 

Generally, the progression of reporting is as follows:

Limited Phase I - also known as a Transaction Screen Assessment - TSA. Eliminated in this report is a site visit, a review of certain county or city records or something else. We generally see TSAs for a refinance or in the case of an office building or retail center - where the chances of contamination are unlikely. The TSA is much more limited in scope than the following assessments. 

Phase I. Most typical is the Phase I Assessment. The Phase I reviews old aerials and county and city records for any history of contamination locally or regionally - super fund sites, leaking gasoline tanks, underground storage tanks, or other recognized environmental concerns. Interviewed are the neighbors and cataloged are the current and previous uses of the site with an eye toward anything that would pose an environmental risk. Nine times out of ten, the Phase I recommends no further action and the deal can progress. However, in that other 10%, additional testing may be required. 

Phase II. When additional testing is recommended, an invasive test - Phase II is employed. Several soil samples are taken in the area of concern on the interior or exterior of a building. Analyzed are the soil samples for evidence of hazardous chemicals which may pose a health risk to occupants of the building. Also taken into consideration are the gases emanating from the soil, which if breathed could be carcinogenic. The State of California places certain "screening levels" to serve as a guideline for the amount of chemicals allowed. 

Phase III - also known as pre-remediation. Now we are into the area where significant contamination is detected from the Phase II sampling and a decision is made to dredge up the bad stuff and remove or aerate it. A Phase III outlines a plan to rid the site of the harmful soil and building materials including an estimated cost and time table as well as a plan for future testing. 

Remediation. You may have seen a shuttered gasoline station with a big pile of dirt where the pumps once resided - you guessed it, that site is being remediated. In some occasions, remediation may take years and require monitoring wells for future readings. Gas stations, chromium plating companies and dry cleaners are the biggest culprits when it comes to the trifecta of enviro testing - Phase I, II, III.