The phrase “Environmental Site Assessment,” or “ESA,” might ring a bell for anyone who’s dealt in buying or selling commercial properties since 2006. For those who aren’t as familiar, an ESA is basically a report prepared for a property that identifies any potential or existing environmental contamination liabilities. Prior to commercial or industrial property purchases, an ESA is performed to assess the presence or likelihood of contamination, and outline cleaning procedures if contamination is discovered. Depending on the severity of contamination, ESAs come in three “phases.” A Phase 1 ESA is necessary to determine if Phase 2 and/or a Phase 3 needs to be conducted. However, there’s a big change that will significantly impact CRE transactions when it comes to Phase I ESAs, leaving many to wonder if it will impact the cost of getting one.
Every 8 years, the ESAs standards must be updated in order to clear up any vague terminologies, iron out any inconsistencies with report deliverables, etc. The American Society for Testing and Materials (ASTM) has completed Phase 1 updates and submitted them to the Environmental Protection Agency for approval. The EPA is expected to accept these changes and incorporate them into its regulations later this year.
So, what are the changes?
The new standard (that just rolls off the tongue) is the ASTM E1527-21, which replaces ASTM E1527-13, enacted in 2013. The previous standard outlined rules and best practices for determining the presence or material threat of hazardous substances and petroleum products on a commercial real estate site. The majority of the revisions to the Phase 1 ESA standard are “clarifications” rather than actual changes.
The most significant clarification, though, is in regards to Recognized Environmental Conditions (RECs). The definition of a REC has been updated in the ASTM E1527 in order to achieve more consistent results on the ESA reporting. Under the old standard, a REC was defined as a “likely” presence of “any” hazardous substances. The new standard takes the wishy-washy adverbs out to define a REC as a “presence of hazardous substances.”
Though the bulk of the Phase 1 ESA changes are lexical, the update that will impact CRE transactions the most is what must be examined during the historical review. Not only does the 2021 standard require a thorough historical review of the subject property, but it also requires a thorough historical review of adjacent properties. Regardless of the results of the subject property’s review, the core historical records for adjoining properties will need to be reviewed at a minimum.
Simply put, if you’re buying or refinancing a retail, industrial, or mixed-use property with multiple tenants and a long occupancy history, the person conducting the Phase 1 ESA must thoroughly investigate the businesses that occupied the adjacent site. It’s worth noting that failing to identify dry cleaners that have gone out of business in a Phase I ESA is one of the main reasons for the increased attention on historical research and adjacent properties.
Per the old standard, environmental professionals could use their own discretion on how many historical sources (building department records, property tax records, city directories, zoning records, etc.) were necessary to use. Now, environmental professionals must use historical aerial photographs, historical city directories, historical topographic maps, and historical fire insurance [Sanborn] maps at minimum. Again, these sources must be reviewed for both the subject property and any adjacent property.
Oh, and what’s considered an adjacent property doesn’t necessarily mean that the adjoining area has to touch the subject property. The new standard requires environmental professionals to review properties across the street and in nearby alleyways. Granted, many companies that provide professional ESA services already knew that looking at the surrounding area was a good rule of thumb. But with the new standards requiring specific reporting on both the subject property and any area near it, it’s not a long shot to believe that Phase 1 ESAs will take longer, and ultimately be more expensive.
The increased time and expense for Phase 1 ESAs under the new standards should be low for an isolated business site with no adjacent commercial, industrial, or retail assets. But, with the additional requirement to review adjacent properties just as extensively as the subject property, the cost of Phase 1 ESAs could be significant for an industrial property located in the heart of an industrial zone with a long history.
If the cost of Phase 1 ESAs do in fact go up, then that could exacerbate a honey trap that already exists: loss-leader ESAs. Some less-than-scrupulous environmental assessment companies intentionally underbid the price of a Phase 1 ESA, only to turn around and immediately recommend an exorbitant Phase 2 ESA in order to recoup the cost. Even though it’s tempting to hire a low bidder to perform an unavoidable examination of the property for your deal to go through, especially if the process does get more expensive because of the new updates, it’s seriously best to avoid them. If someone is performing an unusually cheap Phase 1 ESA, even with the new requirements of looking at abutting and nearby properties, there’s a corner getting cut somewhere. Those who opt for the cheap Phase 1 ESA often find themselves confronted with reports that call for additional investigation. When that happens, they’re responsible for paying for the additional work, and it’s practically impossible to get out of it.
All in all, the latest ASTM standards aren’t changing the ESA process all that much, other than tweaking the language and requiring a more thorough investigation. But even now, environmental studies are sometimes viewed by buyers as an expensive and bothersome stumbling block to completing their real estate transaction. However, it’s important to know that the liability that comes with purchasing a contaminated property comes with a price tag that could be exponentially more expensive than the land itself. Not to mention that if unknown sources of contamination are not located, they can continue to damage the soil and groundwater. This has the potential for a significant detrimental influence on the community and the environment. Dealing with the ESA may be a bane for many commercial buyers and sellers, however, it pales in comparison to the detriment of an overlooked and steadily growing toxic environment that tends to wreak havoc on one’s bottom line (and… the environment).