Reading the phase one ESA: We are all environmental risk assessors - by Chuck Merritt

September 04, 2018 - Long Island
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The title of the article is not designed to transfer responsibility of those with environmental expertise to those who do not possess that skill set or experience. Yet everyone involved in a transaction that reads a phase one environmental site assessment (ESA) or at least the conclusion section, must assess its contents. If the client of the consulting firm is a lending institution, there may be an environmental risk officer on staff who is tasked with managing the approved list of consultants. Their primary role is to then read the report and help decide if the bank has any unwanted risk. There can be many factors in assessing that risk which go beyond the statements in the report. The relationship with the borrower, loan to value of the property and an cost to cure estimate (if possible) are tools that can used in assessing that risk. Other lending institutions who do not have in-house staff with this expertise rely on the firm that prepared the report to help assess the risk. The consulting firm hired should have the ability to provide this guidance. Some situations are easier to evaluate than others. The abandoned gas station with no documentation demonstrating proper removal of the prior buried tanks or a remediation that may have taken place at the site are easier for all to agree that “more” is needed. However, a potential problem emanating from the adjacent property can be a bit more difficult to grasp what the concern is and the additional cost involved for more testing that may be needed. This is generically known as the phase 2 investigation. The scope of the phase 2 will vary from project to project depending on what concerns have been raised.  

When a buyer of commercial real estate commences with a phase one, they become a risk assessor when reviewing the final work product. A favorable or “clean” phase one does not guarantee all is well. For instance, a vacant property in an urban area to be developed can have a favorable outcome in all the sections of the American Society of Testing Materials (ASTM) most recent standard and still have a potential impact (contamination) within the subsurface soil or groundwater. So, the client and the company that prepared the report should together assess the risk of what may lurk below. This is the due diligence phase and since New York is a buyer beware state, the only time a purchaser can investigate as much as they want (depending on the provisions in the contract). A consultant can provide the guidance necessary as to what conditions may potentially exist, but the client (purchaser) ultimately needs to assess the risk and decide how they want to proceed. 

It is important for the buyer to consider a lending institution’s risk assessor who will ultimately be reviewing the report prepared for the borrower directly. Although the buyer may not want or have the ability to conduct more investigation due to contractual limitations or timeframe deadlines, a lender may not want to share in that risk. Whether done in house or with an outside firm, one should expect their lender to review the report. Lending institutions are usually more cautious with potential environmental risks then a buyer who has more of a risk tolerance for such issues. So, its important that both parties are on the same page or a commitment from the lender may go south quickly.

A seller of real estate must also wear the hat of environmental risk assessor. Whether they hired a consultant directly to help them understand what issues may hold up a future transaction or more commonly, they are provided a copy of a phase one report from a potential purchaser. Since regulators will look towards the owner of the property for any remediation costs that may be required, the seller needs to decide if they want to proceed in that direction. If an issue is discovered through the collection of soil, water or even air samples and the purchaser does not to move forward with the transaction (based on those results), the owner may still have an obligation to address the impact and pay the cost associated.  So, before they agree to the phase 2 investigation, an assessment of this risk is important. Many sellers have relationships with their own environmental consultants, so they should consider passing along the buyer’s phase one to their trusted advocate to evaluate. The consultants can arrange to speak with one another or meet at the site to discuss the findings. Both tasked with assessing the environmental risk for their client. So many professionals involved in a real estate transaction may bear the responsibility in some aspect to becoming an environmental risk assessor. This may happen once in a lifetime such as a seller who has never been in this kind of situation while others are tasked with guiding their clients every day.

Chuck Merritt, LEED AP, is the president of Merritt Environmental Consulting Corp., Hauppauge, N.Y.

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