How much environmental due diligence do I need?

I am often asked this question by purchasers and lenders alike. The answer varies from site to site and client to client. The most comprehensive standard available today is an ASTM 1527-05 All Appropriate Inquiry (AAI) compliant phase one environmental site assessment (ESA). This standard was mandated by Congress and implemented by the federal Environmental Protection Agency (EPA) in 2006. The standard is designed to give the purchaser of real estate the most protection possible within the scope of the assessment. However many lenders also require this style report when deciding on making a real estate loan since it is the most current standard of care available. This typically makes it the most expensive as well. There are several nuances of the AAI report that add to the cost a consulting firm will charge as compared to the older 1527-00 millennium standard. In addition to phase one ESA, transaction screen reports and database/ historical map searches are also available to aide both real estate purchaser and lender in determining the environmental impact on a property. Although significantly less in cost and scope than a phase one, the database and historical map search can typically be done without a site visit and can help determine if any negative designations exist at a property such as a Leaking Underground Storage Tank (LUST) or spill events. In addition, Sanborn maps which may go back over a hundred years in urban settings are a good source for determining if the site was used as manufacturing or if buried gasoline tanks exist. These reports can be completed within 2-3 days. However, without a site visit, issues such as unregistered buried heating oil tanks may not be uncovered within the database search. Many purchasers and lenders use this as a preliminary check on a property at the early stages of a transaction. Much of this data can be used in conjunction with a phase one assessment if provided in a timely manner. ASTM refers to this as the shelf life of the report. Both the 1527-00 and 1527-05 use 180 days (6-months) as the shelf life before an update is needed which typically includes a new database, interviews, etc. The transaction screen is a product that was developed in the early days of the environmental industry (circa 1994) to assist lenders in assessing the environmental concerns of a property. The idea was for a non-environmental consultant to visit the property with a questionnaire for the property owner. If issues such as the existence of a buried oil tank or adjacent properties consisting of a gasoline station were checked yes, the lender would then require a phase one ESA be provided by an approved vendor of the bank. The transaction screen evolved into a standalone product because of the time requirements and cost of obtaining both reports. Since the introduction of the AAI compliant report in 2006, the transactions screen has been used less and less by both purchaser and lender. The biggest concern is that it does not offer any of the legal protections that the AAI report does. When answering the question of "what type of due diligence do I need," I like to spend a few moments with a potential client to find out some aspects of the deal such as: what type of property is it? Residential apartment buildings usually present less potential issues than retail shopping centers that may have housed dry-cleaning or commercial printing tenants that can cause sub-surface impacts. Is the site on a municipal sewer or on-site sanitary system? On-site sanitary systems such as cesspools and septic tanks tend to keep much of the contamination on-site where as municipal sewer systems will carry the contaminants in pipes to treatment plants many miles away. Is the property in the five boroughs of New York? Many sites over the past several years have been flagged by the Department of Environmental Protection (DEP) as E or little E designated. The E-designation was designed to require additional investigation in the form of soil/groundwater sampling to insure no sub-surface contamination is present prior to any redevelopment of the property. This goes beyond a phase one assessment but should be noted within the conclusions/recommendations section. Typically the E-designations are in areas that are being re-zoned to residential use from manufacturing/industrial use. The other question that arises in the environmental industry is: are you obtaining financing? What will that particular lender require? Does the bank policy mandate they require the AAI style report or a lesser version? Sometimes a re-finance versus a new origination will determine what the bank will require. Is the Small Business Administration (SBA) providing financing? They do follow the AAI style report and add some of their own nuances to the reports prepared for them. Fannie Mae and Freddie Mac also have particular ways in presenting environmental findings. All of these factors will impact the cost and timing of the final product. As with many things in life, the earlier you begin the process the better you will be in the end. There is little value in ordering a lesser product such as a database or transaction screen if your lender will require the AAI compliant report. This can lead to the bank rejecting the report days before the closing resulting in additional costs to expedite the process in order to provide the report required. Chuck Merritt is a LEED AP and the president of Merritt Environmental Consulting Corp., Hauppauge, N.Y.