How Environmental Reports Play a Role in Commercial Real Estate Sales

Published: 08-25-22    Category: Environmental

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

CRE Environmental Site Assessment

If you’re considering purchasing commercial real estate, such as an office building or warehouse, your lender may ask you for an environmental report as part of their underwriting process.

The phrase “environmental report” doesn’t tell you much, especially if this will be your first purchase. In a nutshell, the purpose of a commercial real estate environmental assessment is to locate and identify any property or site contamination.

We’ll describe each phase of an environmental report, define required guidelines for hiring an inspector, provide details of possible findings, and more.

What’s an environmental report?

Since the passage of the Superfund Cleanup Acceleration Act of 1998, anyone interested in selling, buying, or financing a commercial property is required to have an environmental report, or environmental site assessment (ESA) performed to uncover evidence of property or site contamination.

An ESA is a combined inspection/investigation of a commercial property.

  • An ESA is required as part of a lender’s underwriting procedures before a loan is approved for a commercial property.
  • The report’s purpose is to discover any dangerous contaminants that may affect residents or visitors to the property.
  • These contaminants may be within the property itself or any land that will be purchased together with the property.

Contaminants identified may include, but not be limited to, the following.

  • Soil contamination;
  • Groundwater contamination;
  • Asbestos;
  • Radon;
  • Lead-based paint;
  • Hazardous substances or petroleum products.

These are some of the more common (and therefore, more commonly handled) contaminants you may find.

As a Buyer, Familiarize Yourself With These Reports

A commercial property that has been vacant for several months may be harboring black mold, which may be expensive or impossible to remove.

Since a buyer of a commercial property will usually be expected to cover the cost of the environmental report or ESA, it’s important for the buyer (you) to learn the basics of these reports.

In particular, buyers will need details of possible potential findings during an environment report, especially if any conditions must be remedied. This process is described as the remediation process.

Hiring an ESA Inspector

Generally, a qualified inspector or Environmental Professional will adhere to the Standard Practice of American Society for Testing and Materials (ASTM) E1527-13.

An Environmental Professional is someone with the following background:

  • A current Professional Engineer’s or Professional Geologist’s license or registration from a state or U.S. territory with three years’ equivalent full-time experience; OR
  • A Baccalaureate or higher degree from an accredited institution of higher education in a discipline of engineering or science and five years’ equivalent full-time experience; OR
  • Have the equivalent of 10 years full-time experience.

While it’s impossible to quote an accurate rate for an ESA Inspector within this guide, be prepared to pay a higher rate for a more experienced inspector with favorable reviews.

The environmental assessment must include the following:

  • Identify possible environmental effects.
  • Propose measurements to mitigate adverse effects.
  • Predict whether there will be significant adverse environmental effects, even after the mitigation is implemented.

Hiring an environmental inspector should not be a bargain-chase: You want to make sure you’re paying for value.

Phases of a Typical Environmental Report, or ESA

Below are the phases of a typical environmental report.

Phase I

The first ESA inspection of a commercial property is commonly known as Phase I.

Here are some of the procedures that comprise a typical Phase I report.

  • The ESA investigator will be searching for, identifying, and recording Recognized Environmental Conditions, or RECs, in and near the property.
  • In addition, the investigator will research past tenants and prior uses of the property to determine suspicion of contaminant use.
  • Before completing the inspection, the investigator will look for evidence of pollution by examining the adjacent land.

If any contaminants or hazardous materials are located or suspected, a Phase II inspection will be arranged.

Phase II

After contamination is suspected, investigators will conduct a more thorough investigation.

  • If there are RECs present on the site, then the environmental professional will recommend that a Phase II Environmental Assessment should be completed.
  • The most frequent substances tested are petroleum, hydrocarbons, heavy metals, pesticides, solvents, asbestos and mold.
  • A Phase II inspection will identify the RECs by doing intrusive testing.
  • Holes are drilled into the soil (these holes can be outside the building, or through the foundation to the soil underneath).
  • If necessary, containers are installed into the holes to take groundwater samples.
  • During the drilling, the environmental professional takes soil samples and then submits them to the lab.
  • The inspector may return and use the monitoring well to sample the groundwater and submit those samples to the lab. The results will determine whether there is actual contamination.
  • Phase IIs may also include additional testing, such as indoor air quality.

The cost for this report can vary depending on the property and the situation.

Overlooking ESA’s Will Cost You in the Long-Run

While an environmental report adds to the costs of financing a commercial real estate purpose, it may prevent future problems and costs.

For example, a cash buyer of a commercial property who skips the ESA may be on the hook for any clean-up costs if contaminants are found.

Any lender who offers funding without an assessment could also face major, unforeseen problems, making this a risky deal for everyone involved.

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