Hot Environmental Topics

Do not misuse the term Phase I  ESA

Dec 20, 2023 10:43:00 AM / by David C Sulock posted in Phase I, Property Transaction Screens, AAI All Appropriate Inquiries, Phase II, Phase I ESA, ASTM E1527-21

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Do not misuse the term Phase I

A Phase I ESA (Environmental Site Assessment) is historical research on a property, typically commercial that looks for potential environmental impairment to the property.   No testing or remediation is performed in a Phase I.  A Phase II is all about testing and a Phase III is Remediation. 

The map below is of a long-since-developed site, that in the map was a train turnaround.  Trains are notorious for oil leaks and spills, surely a train turnaround such as this would hold legacy contamination that an unsuspecting property owner could be inheriting if they did not complete a Phase I.

What is a Phase I Environmental

Regarding testing, no Phase I is required to test, A Phase I identifies areas that could require testing.  Case in point, the photo below shows a storage tank on its side.   There is a concern because anything stored in the tank could have leaked out because the tank is on its side.  There would be a recommendation in a Phase I to test the soil around the tank.   But no testing is completed during the Phase I, that is left for Phase II.

Dumping fund Phase  I ESA

You can't skip a Phase I and go to a Phase II as the Phase I is your road map of what to inspect. 

The most common misuse of the term Phase I is from residential home inspections.

We are commonly called to do an inspection of a property after a Home Inspection is performed.   It is not uncommon that the home inspector notices evidence of mold, or some other environmental hazard such as a former oil heat, and recommends further evaluation, which is prudent and warranted for sure.   But when a Phase I is recommended, it shows a clear misunderstanding of what a Phase I ESA actually is.

Here is an exert from such a report

"Underground Fuel Tanks Noted:
The evidence noted is the presence of either a fuel tank fill pipe or a fuel tank breather pipe at the referenced location. There is evidence of an underground fuel tank installed on the property. Further investigation is required to determine the condition of the tank as well as the presence of any leakage into the soil. A Phase 1 environmental audit of the subject property is recommended to determine the presence and/or condition of the underground oil tank and to see if other environmental hazards are present. The soil should be evaluated, and the tank should be pressure tested. Permanent removal of the underground storage tank should be considered. They do not leave fill pipes behind if the tank was removed. There is no evidence an oil tank was located in the basement.

A Phase I ESA follows ASTM protocol for historical research of a property, 99% of the time it’s performed on commercial not residential, unless multi-family.

A Phase I is meant to identify the potential for contamination of a site by hazardous or toxic materials and to identify other possible environmental constraints on the site. It is not meant to be a detailed, comprehensive investigation based on quantitative or qualitative analytical data. No environmental sampling and analysis will be performed under the Phase I scope of work. The form and content of this ESA I will follow the form and content as outlined in ASTM standard E 1527-21. The results of the Phase I ESA will be used to determine whether or not further study (such as a Phase II ESA) is warranted, based on the background information gathered and the results of the site inspection.

https://www.currenenvironmental.com/blog/why-a-phase-i-is-important

 

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What is the Difference between a Phase I and a Preliminary Assessment?

Nov 28, 2023 10:46:00 AM / by David C Sulock posted in LSRP, Phase I, AAI All Appropriate Inquiries, Due Diligence, Phase I ESA, Preliminary Assessment

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A Phase I ESA is like your common screwdriver, a trusty, and dependable tool that most people know what it is used for, just like buyer due diligence, which is your insurance when buying a property.  A Phase I when completed properly provides protection under CERCLA, the Federal Superfund law, so Federal protection.

A Preliminary Assessment or "PA" is more like the tool in your workbench that you are not 100% sure what it is or how to use it.  New Jersey has its own innocent purchaser defense that requires a property owner to demonstrate that, at the time they acquired the property, they did not know and had no reason to know that any hazardous substance had been discharged at the property, by performing an “all appropriate inquiry” prior to purchase.  The PA provides NJ innocent landowner defense. 

 

what is a preliminary assessment

A Phase I Environmental Site Assessment is meant to identify Recognized Environmental Conditions (REC)as defined by the American Society for Testing Materials (ASTM).   A Phase I report will include a comprehensive records review, interviews with knowledgeable parties, noninvasive walking inspection of the property, any data gap identification, an environmental lien search, and a comprehensive historical records review (think a 100 year lookback).

The current ASAT standard for a Phase I is E1527-21 which outlines how to assess the environmental condition of the Property utilizing the All Appropriate Inquiry (AAI). AAI is defined as an inquiry into the previous ownership and use of the Subject Property consistent with good commercial or customary practice as defined by CERCLA 42 U.S.C. §9601(35) (B). According to ASTM E1527-21, non-scope considerations that a consultant may want to assess in connection with commercial real estate and to which no implication is intended as to the relative importance of inquiry into such non-scope considerations consist of: asbestos-containing building materials; radon; lead-based paint; lead-in-drinking water; wetlands’ regulatory compliance; cultural and historic resources; industrial hygiene; health and safety; ecological resources; endangered species; indoor air quality; biological agents; and mold.

A Phase I includes zero testing but may find RECs that require testing.  The Phase I evaluates a property’s environmental condition and assess its potential liability for contamination. 

Levels of Due Diligence in New Jersey-Do I Need a Phase I AND a Preliminary Assessment?

A Preliminary Assessment follows EPA guidelines not ASTM and is like a Phase I on steroids. The Preliminary Assessment will include an Order of Magnitude Analysis to ensure that previously generated environmental data is compliant with current regulations.  The PAR (Preliminary Assessment Report) is more detailed regarding both research and database research.  The Preliminary Assessment will look at historical manufacturing directories, deeper level of contamination identification, including recommendation(s) should the PA reveal any Areas of Concern (AOC) that require further investigation.  The more extensive environmental evaluation in a Preliminary Assessment entails a search/evaluation of the Site, specific to both current and historic operational and environmental information to determine if there have been any confirmed or potential releases or discharges.  A key part of this is an “Order of Magnitude” evaluation comparing past investigation results to current regulations and standards. Standards change and what may have been acceptable in the past can be out of compliance today.  Past environmental investigations can be found to be lacking and not compliant with today's standards, thus requiring further evaluation.  The additional layer of evaluation helps support a property owners NJ Innocent Purchaser Defense and, in some circumstances, can help acquire funding to remediate sites should contamination be found that was not identified in the report. 

Phase I  Preliminary Assessment Pro Tip 

In New Jersey, if you are opening a daycare or are subject to ISRA,  you need to complete PA, as NJDEP requires a PA not a Phase I.

 

IMG_7521

Important facts about a Phase I vs a Preliminary Assessment

1.   A Phase I ESA is a screening tool to evaluate possible environmental liabilities at a property.   It is strictly lender level ASTM compliant research and data review for financial transactions. The party paying for the Phase I may choose to not investigate(test) any RECs from the Phase I.  A Preliminary Assessment covers state (NJ-specific) liability and is necessary to be in compliance with NJDEP's Technical Requirements for Site Remediation (N.J.A.C. 7:26E)  to obtain protection from potential liability as an innocent landowner (under the NJ Spill Compensation and Control Act N.J.S.A. 58:10-23.11) 

2.  The timing of a Phase I is 2 to 3 weeks.  A Preliminary Assessment takes longer and can  take 20-45 days, due to the additional research involved and you have to wait to receive File Review replies from local and state agencies.

3.  A Preliminary Assessment will include recommendations for a Site Investigation of Areas of Concern (AOCs).   A Phase I does not require recommendations for further investigation.

 Can you combine a Phase I & Preliminary Assessment?

The short answer is yes you can develop a Phase I - Preliminary Assessment report,  If you’re performing real estate due diligence in New Jersey and want to qualify for both federal and state innocent purchaser liability protections, you need to perform both an ASTM Phase I ESA, as well as a NJDEP PAR

Curren has been working on PHIs for over 30 years and this has been a more recent trend in real estate sales.  Curren has been performing PHI/PAR reports for many clients with legal representation in the transaction.   

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IMG_4209-3

 

 

 

No testing is performed during the typical PHI and PAR.  The sampling would be performed during the PHII ESA or Site Investigation phase.
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Phase I ESA Tips  aka The Best Phase I

Nov 15, 2023 11:49:00 AM / by David C Sulock posted in Phase I, AAI All Appropriate Inquiries, Due Diligence, Phase II, Phase I ESA, Phase II GPR, ASTM E1527-21

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Phase I is the foundation of due diligence when buying a property. Phase I environmental audits are so important for purchasers of commercial real estate. Environmental regulation places the burden of environmental cleanup on a property owner.  If contamination occurred at a property 40 years ago and 5 owners ago, regardless of who owned the property in the past, the current property owner is the Responsible Party for the cleanup. 

Short story, a professional firm, was closed over a weekend.  When employees returned on Monday, they found a 14,000-gallon tank in their parking lot.  The tank was dumped there over the weekend.  This dumping was reported to the police and security cameras caught the entire process, unfortunately, the cameras could not decipher the license plate.  The bottom line the property owner had to pay to properly dispose of the dumped tank. 

dumping

 

That said, how do you know you are getting the best Phase I?

The environmental company should express that the  Phase I can be completed within 3 weeks on average.   Longer time frames would occur if there are government records (environmental reports at the State) that must be reviewed which can take three (3) more weeks to access.  You, as the client, need to be told that Phase I may not be able to be completed as fast as you would like, which many environmental consultants do not want to address.

Quick Story

Environmental company out of Buffalo, NY, did a Phase I at a property in Southern, NJ for an SBA loan.  Timing was mission critical, Phase I report was completed but it had a large data gap, as their recommendation below states:

Recommendations
Additional investigation is warranted to assess the on-site subsurface conditions due to the potential for on-site USTs and long term automotive repair, and should include the area of the floor drain/sump discharge and former in-ground lifts. A review of the 2016 NJDEP Case may help reduce the scope of work. Nevertheless, if investigation identifies a concern, further investigation/remedial work may be required.

Reading between the lines here the consultant knew there were reports with NJDEP but did not review them as they had to complete the Phase I in a short time frame.  Fact, the Phase I was not complete and should not have been issued until the State files were reviewed. Now the consultant wants more money to review files that should have been reviewed as part of the Phase I.  This is very common and wrong on many levels.

Your takeaway should be that you have to be provided realistic time frames to complete the Phase I.

It is estimated 70% of Phase I's require some form of a Phase II.  Now understand that while a Phase I could be classified as white collar, a Phase II will include an aspect of blue-collar work.  Most environmental consultant do not staff people or equipment necessary to perform a Phase II.  Many Phase I customers end up getting hit with the markup from subcontractors that consultants utilize for the Phase I.  You also get wacked with dealing with a 3rd party schedule.

Quick Story

Curren completed a Phase I for a business and property being sold.  Phase I found contamination, buyers bought the site and one of the partners had a friend that worked at another environmental company, that took over the management of the contamination post purchase.  The rub was the friend's company, owned no equipment and subcontracted everything and they had fallen into and out of bankruptcy several years ago and had a long list of vendors they never paid.  Curren Environmental got called back to supply equipment for the investigation and remediation of the site, only Curren couldn't extend credit to the environmental company due to their prior bankruptcy.  The buyer had to pay for all our work which the partners questioned why they switched companies in the first place.  I think their biggest concern was the financial health of the company they hired.

The lesson here is hiring a company that covers tasks of Phase I, II & III, can make your project smoother.

Best Phase I ESA  Choosing a company for a Phase I

 

3    Ask the consultant to Predict Your Future

  • When you hire a company for environmental you want experience.   The more you know the better you are at evaluating  risk.
  • Buying a farm = GPR for tanks, past farmer dumping and pesticide contamination.
  • Buying a gas station = former tanks
  • Buying a strip mall = any past tenants that could cause contamination?
  • Industrial Land = What operated there? Manufacture companies and waste generation.
  • Buying land to redevelop = Any off-site contamination concerns that could affect your development
  • Known Contaminated Site = what has been done and how viable is owner of value of land vs contamination

If you give us the site address and some prior history, the crystal ball can go to work to prep you for what could be in store for you.    This is often bad news and potential negative issues that could affect the transaction, but topics that you should be aware of during your due diligence.  This may even deter you from proceeding with the purchase.

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What are Real Estate Due Diligence time frames?

Oct 3, 2023 12:54:57 PM / by David C Sulock posted in Phase I, AAI All Appropriate Inquiries, Due Diligence, Phase II, Phase I ESA

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What are appropriate Due Diligence time frames?

One of the most common issues in buying and selling real estate is unrealistic due diligence time frames & settlement dates.  Settlement dates that are set PRIOR to any due diligence being completed is the biggest failure. If you are involved in real estate and the due diligence finds an Area of Concern (AOC) or a Recognized Environmental Condition (REC) 80% of the time the settlement date needs to be pushed back.

Quick example, completed Phase I ESAs for a site in New Jersey and Pennsylvania, both found potential USTs. Both required a geophysical, at one of the sites the property owner of 29 years swore there were no tanks, but they had zero paperwork to support that statement. Fast forward three (3) tanks were found between the two sites. Now you have to get NJDEP & PADEP permits and register the regulated tanks, both sites took about 50 days to get government permits.

 

how long is environmental due diligence?

 

Understand that Due Diligence has Many Layers and steps.

Take for example a farm being purchased that required a Phase I ESA, the due diligence period was set for 30 days with settlement on the 31st day.   The concern of the parties was whether the Phase I could be completed in 30 days, 90% of the time it can be, for the record most Phase I's can be completed in 2 weeks, sometimes 3 weeks.    But the real issue is the parties left no time for a Phase II, if required, and most all farms would require some form of a Phase II and that's coming from 30 years of experience.  Even if you tell people testing is likely going to be recommended, no one listens and no one extends the due diligence period, but everyone gets upset when they have to change the settlement date. Sure the seller could have done their own Phase I & II prior to selling the property and saved time and headache, unfortunately, few sellers are that forward thinking.

 

How long does a Phase I take?

Let’s say, a property has had remediation completed, and multiple areas on a property were remediated. We just had a site that fits that bill.   A Phase I is still completed to protect the buyer but the Phase I has to review state environmental reports that were submitted, which can take 4 weeks to get copies of reports.  (Fact most owners have incomplete reports or cannot find the reports).   Obtaining records from the government is not quick and yes a one (1) month wait is not uncommon.  The 4-week due diligence period must be extended.  

On the site we just dealt with, which was commercial, it was disclosed that multiple AOCs had been remediated and closed out with the state.  But this site had other areas that were not remediated that warranted testing, multiple, like $42,000 worth of testing.  Granted the property was 10.7 acres, listed for close to 3 million dollars, so it should not be surprising that AOCs existed on the property and were not evaluated by the seller, I mean few people who own real estate want to find a problem. The buyer still wanted to proceed with testing and purchase, and the seller did.  Well, the seller ended the contract, they were concerned problems would be found they would have to address.  Now, did the seller side warn them that this scenario was possible, hard to say but I would venture a guess the answer is no.  Is the seller wise in thinking another buyer will come along to buy the property without testing? They can hope but are unlikely.  The buyer was more than upset that a deal valued in the millions would be stopped in its tracks due to their desire to test and ensure they were not buying a contaminated property.  The buyer also was willing to contribute to some amount of remediation.  

But let’s say the deal kept moving forward and the seller gave another 30 days of due diligence.  The testing could be completed in this 30-day window, but if remediation was warranted, 30 days is not enough.   But the seller says we can price out cleanup and negotiate a price reduction within 30 days.   Still an epic unrealistic situation as Phase II is just evaluating if contamination is present not the extent.  Say three areas out of 14 need remediation (an unrealistic low number but just play it out).    Your next step is to define the 4 areas which could take another 30 days maybe 90 depending on soil and groundwater.   This situation actually played out on another site and the due diligence was 9 and 1/2 months.

Pro Tip

All you bankers, real estate professionals, sellers, buyers, and lawyers listen up.  Ask your environmental professional what they would estimate for a reasonable due diligence, when a Phase I & II may be necessary.  Before you ask do not give them your desired date of settlement, you will likely bias their answer. Although as environmental professionals we are not clairvoyant, we can assess sites from a desk, and utilize experience from other sites we have evaluated many times before to say you may want to budget 60 days or 90 days, if it's less, well then you can settle sooner.  You should also consider if any cost sharing will occur with Phase II between buyer and seller and what the seller's pain point is on paying for remediation.   

For example, the client had a retail strip of stores with historic groundwater contamination. The economical solution was to monitor the groundwater for 8 quarters to show a declining trend and permit the contamination in place.    The 2-year budget was $86,000, which was also the amount the seller was willing to place in escrow after the sale for the buyer to use to pay for the work. But the $86,000 was a budget and could trend higher or lower.   This confused the buyer as well as the fact that there would be costs after the site is signed off that the owner would be responsible for and this is assuming groundwater trends lower. Some sites do not and you need to perform remediation to push levels lower.   This is another situation where all parties were not transparent regarding time frames and costs and what each party was willing to accept.

Last example and let me dumb this down for you.  

A residence had a leaking tank, which was discovered during due diligence.  The future cost of remediation was determined, what was not discussed was the time frame to remediate and when state would review and sign off (typically 2 weeks to 6 weeks to 2 months, depending on your state).     Well at settlement these time frames were discussed and the buyer backed out at the settlement table.  Now the blame on this one was the environmental company not timelining the remediation (parties not asking either).   People went in with blinders on and the deal fell apart.

If your due diligence finds environmental concerns, know that environmental has no drive-through lane, no same-day delivery, heck not even a delivery date.  Like medicine and law, it’s a practice, a somewhat inexact science, but data sets are out there if you are willing to listen.  So rather than say due diligence is 30 days, ask what the consultant thinks is the reasonable time frame.   Play out a couple of scenarios so all parties have an idea of what could happen, plan for the worst, and hope for the best.

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Why environmental testing is Important?   aka do I need a Phase II?

Mar 13, 2023 10:18:00 AM / by David C Sulock posted in Phase I, AAI All Appropriate Inquiries, Due Diligence, Phase II, Phase I ESA, Phase II GPR, 1031 Exchange, ASTM E1527-21

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Go to your doctor and no matter how healthy you look, they take tests. Go to the dentist, and you get x-rays.  Regarding environmental issues again you need to test to verify nothing is present.  If you do not test you have a 100% chance of not finding anything.

Environmental Due Diligence is meant to protect a purchaser, commercial due diligence starts with a Phase I and can lead to a Phase II (testing), which while buyers are aware a Phase II is a possibility, it can also find a problem, so why do a Phase II if finding something is not 100% certain?

The map below which is from the 1940's shows an auto sales storefront in a downtown area.  It lists a 550 Gallon Gasoline UST in front of the building.  Today there are retail stores with a coffee lunch spot.  Really zero current evidence of anything automotive or gas tank related.    So, say you want to buy the property.  Do you assume the gas tank is not there anymore?  No, you scan the area by completing a GPR Survey to make sure it's gone and if it's still there you have owner remove the tank.  

Phase II ESA

 

How about below, a then and now photo?   Are the tanks still there?  Do you think if the gas tanks leaked, and you owned the property you would be responsible?

Phase II Testing

What if you find that the tank is gone, well you now take soil samples to make sure there is no residual contamination.   And yes if contamination is found, the property owner owns the problem.

Phase II Subsurface soil samplingWhy environmental testing is Important?

People suspect a building component contains asbestos based on appearance and age of building, but you do not know 100% unless you test.  When you are doing a risk assessment or any other form of environmental due diligence, you would assume the component contains asbestos until proven otherwise.  The same goes for PCB's in an electrical transformer.  Assume it contains PCBs until it is labeled otherwise.   So, while a property owner wants to believe these is no contamination, a buyer can't rely on that belief.  Hence the need for a Phase I and sometimes a Phase II which includes testing.Phase II is testing

 

A case in point an older manufacturing plant (40 years) had a large outdoor compressor.   The compressor at time of sale was only 5 years old, nice and new.   But as an environmental consultant we ask what about the old compressor.  The issue with compressors is they can spit oil and older compressors were known for this.  A REC in the Phase I would be to do a Phase II with soil testing around the 4 sides of the new compressor to look for residual oil from the old compressor.    Yep that is how it works.

 

We had a group looking to buy a large corner property that had commercial operations in  1930's that could contaminate the property.  The buyers were excited to buy the property.  From decades of experience, we recommended testing prior to purchase.  Their response is below

Thank you for submitting a proposal for our project. As you may know, your company is one of only a few that recommend taking soil samples for analysis.   Obviously, once the analysis is completed, the results would need to be disclosed. Shouldn’t a property owner be concerned that these soil samples might uncover a problem that would need to be addressed further?

Our answer is yes if you find contamination it is reportable and the responsibility of the current owner to pay for.   So there are reasons why a property owner may not want to have a buyer do testing.

 

If you are buying or selling real estate you need an experienced environmental consultant 0n your side, call the experts

 

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Why environmental testing is Important?

 

 

 

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Environmental Due Diligence in Commercial Real Estate Transactions

Mar 8, 2023 10:09:20 AM / by David C Sulock posted in Phase I, Property Transaction Screens, AAI All Appropriate Inquiries, Phase II, Phase I ESA, Phase II GPR, 1031 Exchange, ASTM E1527-21

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There are inherent risks in life and in particular when you purchase something.   Warranties on products including cars are meant to balance the risk.  But when you buy a commercial property, you are buying more than the land and any improvements, you are buying any environmental issues past or present unless specified otherwise.  (There are sites that have government permitted contamination, that is a restriction on the property for sure. but it is s defined environmental liability). 

 

Environmental Due Diligence in Commercial Real Estate

 

I am referring to the purchase of a property that has undiscovered environmental issues.  How you avoid buying a contaminated property is by performing Due Diligence such as a Phase I Environmental Site Assessment.  More about Phase I ESA Click Here.

 

As this article states when should you be concerned about environmental issues on a commercial property?

The safe answer is on every commercial property that you have not completed your own due diligence.

Yes, that downtown property you want to buy may have been an auto garage, dry cleaner, part of a rail spur, I've seen tanneries (Tanneries are where animal hides are tanned, and the wastes generated from tanneries are considered a pollutant to the environment and has potential to pollute both soil and water because of the use toxic chemical constituents in the tanning process)

environmental issues with commercial properties

The rub of downtown areas is they were the center of commerce, which can cause pollution long before environmental regulations became the norm.   Buying close to a rail line?  Well rail roads caused contamination and land was often built up with historic fill.  (Historic Fill material was commonly used to raise the topographic elevation of properties.    The fill material is composed of non-indigenous material… which may have been contaminated prior to emplacement and is in no way connected with the operations at the location of emplacement and which includes, without limitation, construction debris, dredge spoils, incinerator residue, demolition debris, fly ash, or non-hazardous solid waste). Because of the nature of its composition, historic fill material is a widespread concern for many property owners and potential property purchasers.    In short, the property can have at the time of placement legal contamination, which today is no longer legal.

Yes, none of this is fair.  There are other warning signs when you buy a commercial property even when you perform due diligence, I will run down a couple of items buyers should be concerned about.

 

1.  A Phase I includes interview and questionnaire with the owner who is typically the most knowledgeable party.    When this can't be accomplished you have important data gaps, which may be intentional on part of the seller.

 

2.   The owner has no prior environmental reports, meaning they didn't do their own Phase I or will not supply their report.  Want to know why an owner may not want to be interviewed for a Phase I, their lack of due diligence can be a driver.  

 

The historical map below shows auto sales at a downtown property, and it also lists 550 gallon gasoline tank in the street.  That tank and contamination belongs to the property and will only be known if you do due diligence. 

Commercial property environmental study

3.  The Phase I leads to a Phase II, which is testing and can absolutely open up a can of proverbial worms.  If you test you have a chance of finding a problem.  No testing?  Well 100% chance of finding nothing.  But the rub is when the owner denies or limits testing.  For example, we had a site where both soil and groundwater testing were warranted.  The owner did not want groundwater tested because the property had municipal water.  Groundwater is typically the 1st water bearing zone on a property, a good average is 16' to 20' deep.  You are not drinking this water ever, but if this water is contaminated, well it belongs to the owner.   My point being sellers will come up with some nugget of reason why we do not need to test, which is irrelevant in the context of environmental due diligence.

 

Phase I Due Diligence

 

4.   Owner provides reason why due diligence is irrelevant (remember buyer pays for the work not the seller).  Case in point client buying a former appliance store, which was a former laundromat.   Seller wanted no testing because refrigerators and microwaves are not an issue and a laundromat, well that's just dirty cloths.  Fast forward we test groundwater water and find dry cleaning solvents.  Conclusion, the laundromat did dry cleaning.  Saved our client $165,000.

 

Commercial Property Purchase Pro Tips

Start your due diligence and do not consider Due Diligence to be a hand stamp, because if you find an issue it will take time address it.

Understand that your proposed settlement date was likely set PRIOR to performing Due Diligence.  When Due Diligence finds an issue settlement could be pushed back weeks, months even years. 

 

 

 

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Environmental Due Diligence

Jan 17, 2023 7:15:00 AM / by David C Sulock posted in Phase I, Environmental Site Assessment, Due Diligence, Phase I ESA, ASTM E1527-21

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What is Environmental Due Diligence?

Environmental due diligence is the process that evaluates the environmental conditions and risks associated with a property. The process can be at the request of land developers, lenders, attorneys, or private owners who intend to purchase, refinance, or occupy a property.

The rub with performing environmental due diligence in real estate is buyers spend countless hours researching properties to purchase and when the right one is found, no one wants a delay or a cause a problem.

Environmental due diligence is essential for anyone looking to buy a property, whether commercial or residential. Hidden environmental liabilities are a massive problem you can face when purchasing a property that has not been evaluated for environmental due diligence; before making any large real estate transactions, make sure to understand the importance of this process.

When Is Environmental Due Diligence Required?

Lending institutions typically require environmental due diligence before they will finance a real estate purchase, refinance an existing loan, or accept collateral for a construction loan. If a cash buyer is involved, it is up to them to decide if a Phase I or other form of due diligence is necessary.

Environmental Due Diligence

Who Benefits from Environmental Due Diligence?

Anyone purchasing a property can benefit from environmental due diligence, even if a lending institution is not involved in the sale. The process reduces the chances of someone purchasing real estate inheriting ecological concerns created by the former owners, it also provides an essential legal defense should issues arise.  Buyers get to know if there are environmental issues.  Sellers, although they typically would prefer a buyer not do due diligence, can avoid liability after the sale in the event contamination is found when a Phase I was not performed.  Lastly, lending institutions ensure that their loan is protected from contamination that can diminish the value of the asset.  A million-dollar property with a $400,000 cleanup is not worth 1 million dollars.

How Does Environmental Due Diligence Protect You?

Suppose environmental due diligence is performed before purchasing a property. In that case, the purchaser can gain protection from being held accountable for any pre-existing contaminations on the land according to the Comprehensive Environmental Response, Compensations, and Liability Act provisions. If this process is not completed, the new owner can be held responsible for repairing the contamination.

Buyers can also avoid being hit with the cost of environmental cleanup.   After completing tens of thousands of property transactions, the cleanup of sites is most commonly found when the current owner was lax in performing any environmental due diligence.     There are many properties that are being sold or planned to be sold that have been held by the owner for a number of years and they never did any environmental assessment of the property.  

Environmental Due Diligence

What Does the Comprehensive Environmental Response, Compensation, and Liability Act (CERLCA) Require?

CERCLA establishes the process of determining who is liable for any hazardous substances on a property. Any property owners who are found to violate environmental due diligence can have to pay fines and fix the issues are their own expense, even if they aren’t responsible for the original contamination. Merely owning a contaminated property is enough to make you liable in the eyes of the law; this is why environmental due diligence is so necessary.

What is common Environmental Due Diligence?

The most common environmental due diligence is performing a Phase I ESA.  Phase I is an investigation into past and current ownership and uses of a property to assess the potential existence of hazardous substances or petroleum contamination on, in, or at a property.  It will even look at neighboring properties to see how they can affect the target property.   A Phase I ESA investigation is purely research and a site visit.  There is no testing during Phase I because you don't know if you have to test a site until Phase I is completed.   

There is a level of service you can expect from Phase I as they must be completed by an “environmental professional”.   The goal of the Phase I ESA is to identify recognized environmental conditions (“RECs”) that may affect the property or trigger liability for the buyer and determine whether further due diligence in regard to the RECs is appropriate.  Further evaluation can be Phase II or Phase III.  More about a Phase II & III can be found here  Phase II,  Phase III

A great resource with questions and answers regarding Phase I's can be found below. 

Phase  I  FAQ

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Environmental Liability & 1031 Exchange

Aug 23, 2022 1:53:00 PM / by david sulock posted in Phase I, Due Diligence, 1031 Exchange, ASTM E1527-21

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1031 exchange gets its name from Section 1031 of the U.S. Internal Revenue Code, which allows you to avoid paying capital gains taxes when you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties like kind and equal or greater value.

Not dissimilar to the photo below showing the progress of the famous tower, a 1030 Exchange can allow an investor to keep building up a real estate portfolio.   Unfortunately, skilling environmental due diligence on a commercial site can be a costly mistake when remediation is needed.

Phase I and 1030 Exchange

As a  real estate investor, a 1031 Exchange can allow you to leverage your investment in real estate.  In the environmental due diligence world, we find that 1031 Exchanges tend to skip over environmental due diligence, which places the parties involved at risk.     People need to understand, that the owner of the property =  the RP.  (RP = Responsible Party).  Even in situations where the seller agrees to perform the remediation, we have seen RP's disappear and regulatory agencies will also look toward the owner of the real estate. 

Generally speaking A Phase I Environmental Site Assessment should be performed for all commercial real estate transitions, including 1030 exchanges.    Learn About Phase I

 

Phase I Due Diligence

 

Let's start with the appeal of the 1031 Exchange

First, it allows an investor to pick a new property that allows a greater ROI or diversify the portfolio of properties.

You can use the exchange to consolidate several properties into one asset or vice versa acquiring more properties in exchange for one more valuable one, possible for estate planning.

On an accounting basis, you can reboot the depreciation clock. Meaning rather than simply selling one property and buying another one the 1031 exchange allows you to defer capital gains tax, thus freeing more capital for investment in the replacement property.

That all sounds great right?  Well, the environmental rub is there are time frames for 1030 to execute and we are finding many people have skipped over doing environmental due diligence including Phase I, II & III.   The rub is all Phase I studies follow an outline established by ASTM.  ASTM updates the standard every 8 years.  Generally speaking, when a change occurs Phase I becomes more inclusive.    a Phase I from 20 years ago would be a faster read than one today.  So you can expect that today's Phase I will be more thorough.  

The oil that leaked from this previously sealed pit is now the owner's responsibility to address.

 

Oil pit

How do you protect yourself with a 1030 Exchange?

Real estate transactions are complicated and 1031 Exchanges add a short window to identify properties, which makes people cut corners.

  1. Be savvy and have your environmental consultant evaluate the potential sites.  You can start with a cursory environmental evaluation to find any red flags, you don't always have to do a Phase I.  You can do a Records Search with Risk Assessment (RSRA): Which is where an environmental professional obtains, reviews, and summarizes an ASTM 1527-21 compliant database for the noted property and the surrounding one (1) mile. The review will focus on any pertinent listing for the Subject Property as well as any surrounding properties which could pose a potential Recognized Environmental Concern (REC). The environmental professional will also perform a reconnaissance of the Subject Property. (Access to interior building areas must be granted.).   RSRA's can be converted to Phase I after the decision is made to pursue the property.  RSRA's are helpful if you are evaluating multiple sites but only plan on acquiring one of them.  Now an RSRA is not a substitute for Phase I but rather a way for an investor to evaluate multiple properties without fully committing to Phase I.
  2. Of course, you can also perform a Phase I for the target property.   Savvy investors will get the target property owner to share the cost of the Phase I which will allow both buyer and seller to retain rights and use of the report, in case the 1031 Exchange does not go through.
  3. You can also have the owner perform the Phase I as a condition of your acquisition.   Hey to be fair, the property is going to need to have a Phase I for any buyer and many sellers contract for the Phase I to help expedite sales, even before the property is listed for sale.   Realtors take note, properties with a completed current Phase I go to settlement faster.  Buyers can always have the Phase I peer reviewed by an environmental professional.  Curren Environmental peer reviews a few hundred Phase I reports every month, so this is not uncommon.
  4.  
  5. At this point we hope you have a bit more knowledge about Environmental and 1031 Exchanges.  Want to know more?  Call an environmental professional.
    Call Curren Today

Pro Tip:  Curren Environmental has been doing Due Diligence for close to three decades (Yea we are old).    When you need a Phase II, well we just pivot and come back to the site with some of our equipment. 90% of other companies call a subcontractor which adds cost and time.

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Phase I Due Diligence during Covid-19

Sep 10, 2020 8:15:00 AM / by David C Sulock posted in Phase I, Due Diligence, Phase I ESA

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Commercial Due Diligence includes performance of a Phase I ESA

Well how do you perform a Phase I ESA during Covid-19, when government offices are closed or minimally staffed delaying records request and you have settlement in 3 weeks?

Phase I ESA during Covid-19

Well how do you perform a Phase I ESA during Covid-19, when government offices are closed or minimally staffed -  delaying records request and you have settlement in 3 weeks?  In short you add this known delay into contract as buying real estate during Covid-19 is an unprecedented task.

Lets say you are buying a commercial building in New Jersey during Covid-19 and there are NJDEP (New Jersey Department of Environmental Protection) files that require review.  Of important note if any government environmental agency has records on the property you are purchasing you want those files reviewed.

You do due diligence not just to research current operations but what occurred at the property in the past.

Covid-19 Phase I ESA

Curren was performing a phase I for just such a situation and here is a quick summary of the obstacle faced with public records and Phase I ESA's.

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Open Public Records Act (OPRA) request was  submitted an OPRA records request to the NJDEP on July 1, 2020.

On July 14, 2020 Curren received a response from the NJDEP indicating that due to the COVID-19 restrictions indicting “the NJDEP is not able to fully respond to record requests within the prescribed timeframe under the Open Public Records Act, N.J.S.A.47:1A-1 et seq (OPRA). The NJDEP work force has transitioned to work remotely from home, impacting the NJDEP's ability to access onsite and archived government records, conduct onsite inspections, and copy responsive records. In accordance with N.J.S.A. 47:1A-5(i)(2), which states that the deadlines under OPRA, to grant or deny access to a government record shall not apply if no reasonable efforts are available based on the circumstances, and in maintaining consistency with the social distancing directives of the Governor, the NJDEP is not able to complete the search for responsive records and respond to this request. Once resources allow, the NJDEP will complete and issue the final Government Records Request Form response to this request. We apologize for this inconvenience.”.

On July 13, 2020 the NJDEP submitted a response indicating “At this time, your request is not able to be completed within the statutory time frame specified in OPRA”.

On July 20, 2020, Curren received another response from NJDEP indicating that “Based on this record request, responsive records have been identified and will be emailed to you within 5-business days”.

On August 6, 2020 Curren reached out to the NJDEP requesting information as to the status of the email. In response to this email the NJDEP requested that Curren recontact them if the information was not received by August 18, 2020.

On August 20, 2020, Curren again submitted a request regarding the status of the information and received a reply indicating that we should have the data by Monday August 24.

On August 21, 2020, Curren received an email from the NJDEP with pdf files regarding the site. 

So approximately 7 weeks after a request was submitted the public records were produced.  You can repeat this same story for Phase's performed in Pennsylvania and Delaware, where we have seen similar delays.

If you are buying a commercial property and you are completing a phase I ESA, you need to prepare for longer reporting time frames.

If there one aspect of the economy that has strong forward momentum it is residential and commercial real estate sales.  The boom in real estate transactions (transactions are limited based on availability of properties for sale) are driven by historically low interest rates and the economic blow of Covid-19 on businesses that are driving prices lower and creating a buying opportunity for strategic investors.   In short there are businesses that are closed and real estate is being listed for sale and sold.  This is occurring by both owner operators of property as well as owner/landlords that have lost rental income and are selling the properties. By strategic investors we are referencing a buyers that have near immediate plans for the properties being purchased.  The closure of restaurants and many small business due to Covid-19 has left a dramatically different real estate market

Commercial Due Diligence includes performance of a Phase I ESA.    A Phase I researches current and past operations and diligent inquiries encompass obtaining and reviewing available public records.  Anything submitted to a government agency by nature is subject to review under the Open Public Records Act or OPRA.   Having a Phase I without reviewing OPRA records leaves a gaping data gap in your due diligence.

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                       Environmental Due Diligence

Jan 22, 2018 2:40:50 PM / by David C Sulock posted in Phase I, Due Diligence, Phase II

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If you are purchasing a commercial property, you will be advised to perform reasonable due diligence prior to acquisition.  The standard is performing an ASTM Phase I Environmental Site Assessment (ESA).     A Phase I incorporates research of a site for the determination of past (historical) or current Recognized Environmental Conditions (RECs) that could affect the value of the property.  Banks typically will require a Phase I for high-risk sites or when loan amounts reach a certain threshold.  Banks typically have buyers pay for a Phase I to protect the bank, as the bank does not want to have a mortgagee be burdened with undue environmental remediation expenses that could in turn affect their ability to pay the mortgage.
Commercial due diligence.jpg

 Any purchaser of commercial real estate is performing Phase I due diligence to protect their interest, not is once again not typically fulfilling a requirement of the law.  Due diligence is a prudent practice to follow for any commercial purchaser.   Many buyers contact our office with little to no real knowledge of what a Phase I is and are being directed to perform one by their attorney or realtor.  Many people view a Phase I as getting their hand stamped and the quicker the better so the transaction can go to settlement.  The due diligence aspect is many times an afterthought.

We are going to cover the different scenarios when a Phase I is completed and when a Phase II or III is triggered and why that is a good thing.

tank buried under building.jpg

The best possible outcome for all parties after completing a Phase I, in the eyes of a buyer or seller is that the Phase I finds no issues with the site and accordingly there are no recommendations that any additional work is required such as a Phase II or Phase III.   This is not as common an outcome as many people think or expect.  Sellers do not want you to complete a Phase I as it delays the settlement and opens up the possibility that the Phase I may find an issue.   Buyers do not want a Phase I performed for the same reasons, citing the time it took to find the perfect site at the right price as well as monies already spent to date.  The Phase I is viewed as a necessary evil and one that at best could cost money and delay the sale from 2 to 6 weeks and at worst strike a crushing blow to the sale when a problem is uncovered that the owner was unaware of and unable or unwilling to address.

The odds that the Phase I will come back clean, meaning no RECs are found, is based on numerous factors including the date of site development and historical usage of the site.  We have found that some of the most innocuous appearing sites (upholstery and insurance office), have been found to have potential environmental concerns from PRIOR usage.

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A common Phase I situation is a client that is not required to perform a Phase I by the bank either because the loan amount is not triggering it or they are paying cash or there is a 1031 exchange.  These are rush hand stamped Phase I’s as there are already planned deadlines and the Phase I request is coming from the buyers attorney.  The rush part of the Phase I need is not based on anything pertinent relative to environmental conditions, but rather business or financial needs.   This is where hand stamping is most common.   Timing is relative and the sooner a decision is made on performing the Phase I the faster it will be completed.  In a perfect world a Phase I would be initiated by the seller prior to listing the property for sale.  In practice, it is one of the last things a buyer completes.

Time necessary to complete a Phase I varies.  Most Phase I’s are completed within three weeks, some can take as long as 6 to 8 weeks.  The difference in timing is based on the presence of records at the State and local levels.  The presence of files for a site at an environmental agency is typically unknown until a Phase I is initiated and the agencies are contacted regarding any files.  If files are found, the review of reasonably ascertainable files is required.  There could be a multiple week wait to get access to these files as they may be in storage or the first available date the State gives is 4 weeks away.   The time to access environmental files at a State level is the under looked aspect of a Phase I.  The determination that no files exist allows the Phase I process to be expedited.  The presence of environmentally-associated records indicates that investigation/remediation work may have been initiated or completed.  Records must be reviewed by a person with the experience and knowledge of applicable regulations to confirm that investigations/remediation has been completed in accordance with the local, State and Federal regulations.  A recent Phase I had pertinent files that were at the State.  Based on ability to accumulate the records and schedule the first available review date, it took five weeks to just perform a cursory review.  The review found that the site was formerly a gas station and had gas tanks removed and properly closed though the State.  What the file review did not indicate was the presence of other tanks on the site that appeared to have been either removed or left in place.  The unknown tanks consisted of a heating oil, waste oil and kerosene tank.   This triggered the need for a Ground Penetrating Radar (GPR) survey of the site to search for the possible missing tanks.  In this case, the buyer was sure that all the tanks were removed and signed off by the State, unfortunately that was not the case.  In this case, the buyer did not buy the site and the owner had more work to complete including the removal of the tanks.

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When you start a Phase I, anticipate that a Phase II may be the necessary.  A Phase II is testing or further invasive evaluation of a suspected environmental concern.   Another Phase I performed found the need to complete soil borings on the site in areas where the operations of the site may have allowed historical seepage of oils and chemicals into the soil.  The Phase II did indeed find contamination in all the borings completed.   At this point the purchaser was into the property for over 20K, which including attorney’s fees, zoning applications, engineering and environmental.  The next step after finding an area of contamination is to determine the extent of contamination and the associated costs for remediation.  This added weeks upon weeks to the financial deal which could lead to the potential purchaser to look for another property weighed against the monies spent to date.  Most contracts allow the buyer or seller to back out of the transaction if repair expenses exceed a dollar amount or a time limit.   Usually at this point the buyer, thinking they were buying a clean site, is upset about monies thrown down the drain and when the end will occur.   Rarely does the purchaser weigh the fact that the Phase I did exactly what it was designed to do which is evaluate for potential environmental issues that could devalue the site.   Slightly less than $100,000.00, later and almost 7 months from the start of the Phase I was the property cleaned up.  The buyer dodged a remediation expense that surely would have been in their lap if the property was bought without a Phase I as the party they sell too would most likely not be as foolish to purchase without performing Due Diligence.

The photo below is a drum storage area, the floor below the wood was heavily stained.  It was flagged in the Phase I as an AOC and testing was recommended and the testing found contamination.

IMG_6363.jpg

 

Phase I cost sharing.  Due to the unexpected outcome of any Phase I’s in some instances the expense of the Phase I is shared between buyers and sellers.  The advantage for both parties it not just financial (50/50 split), but ownership of the report.  If the transaction falls apart for reasons other than environmental finds issues, the owner has possession of the report and can share same with the next prospective purchaser.

tank removal.jpg

Phase II cost sharing is more complicated.  The Phase II by definition involves physical examinations and in many cases testing.  Phases II expenses can dwarf the cost of a Phase II and due to the potential of finding an issue, many sellers would prefer the testing not be performed.  This is particularly common when the issues being investigated relate to potential conditions that predate the current owner.  This is a very common situation if the current owner purchased the site in the last 20 years and did not perform a Phase I.  Cost sharing is again valuable as the owner has rights to the report and data generated by the Phase II.   In most cases if the Phase II finds an issue that must be addressed or remediated (Phase III) the phase II has to be shared with the owner to document the findings.   Phase I cost sharing is far more common than in Phase II situation.

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