When you’re breaking ground on new construction or buying a new property, the last thing you want to worry about is its past. You want to think about the property’s future: what it will look like, what uses it will have, whether it’s going to be a good investment.
But every property has a past, and sometimes that past includes environmental pollution. That’s why environmental due diligence is an essential part of the real estate development process. You need to find out if there’s been contamination, whether it’s a brownfield that may be eligible for cleanup funding, or whether an environmental site assessment is required for a zoning permit. If you’re undertaking an adaptive reuse project — say turning a factory into residential space — you’ll need to investigate any chemicals that factory left behind before people can live there.
The first step, as Jenny Redlin, REPA, Principal at Partner Engineering and Science, Inc. told lev.co, is a Phase 1 Environmental Assessment that “combines historical and regulatory research along with a visual environmental site assessment to ascertain if there are what are called ‘Recognized Environmental Conditions’ on site.” Sometimes a Phase I ESA isn’t the end of your environmental testing. If contaminants are found on the property, your lender may request a Phase 2 Environmental Site Assessment. This next step determines the nature and severity of the contaminants and whether a clean up process is needed before construction can continue on the property.
It’s not the news every investor/developer wants to hear, but don’t despair! We’ll guide you through what a Phase II ESA is, when they’re required, and everything else you need to know to fully understand your property’s environmental past.
Where Phase I ESAs involve record searches, and visual site inspections, Phase II assessments are much more hands-on, physically touching and collecting samples from the site to assess environmental conditions. For example, groundwater samples and soil samples are commonly taken to check for groundwater contamination and hazardous substances. Phase II Environmental Site Assessments require more physical activities beyond the investigative measures of a Phase I. As Rob Fagerness, Director of Environmental Professionals at CREintelligent, an environmental consulting firm explained, “now you’re going to be actually sampling that subsurface media or perhaps the air media, and trying to make a determination if that impact is indeed happening at the site…Phase I, it’s just [an] investigative component.
While Phase I Site Assessments follow a standard procedure, Phase II ESAs are more specific to the property, its environmental situation and anything found in Phase 1. Resource Manage Associates, a firm that performs assessments stated, “depending on the results of the Phase I ESA, Phase 2 work could include surficial and sub-surficial soil analysis, or groundwater analysis, or installing monitoring wells, or indoor air sampling, mold sampling, asbestos sampling, lead sampling, etc.”
A Phase II ESA is required when the results of a Phase I assessment show the presence of potential environmental contaminants on the property or the surrounding site. For example, Fagerness said, imagine the Phase I investigation found an underground chemical storage tank on the property. It’s unclear whether any chemicals have been released or, if they have, whether any clean up has occurred. Both the presence of the storage tank, and the uncertainty about its contents and whether anything in it was released, would trigger a Phase II ESA. Another common scenario for a Phase II is If the buyer is applying for a Small Business Administration loan and, during the course of the Phase 1 assessment, investigators find out the property in question used to be a dry cleaner site.
“SBA has basically stipulated in their standard operating procedures,” Fagerness said, “that if your site has any history of a dry cleaner, and there’s any reason for the environmental profession to believe that they’ve used chemicals in that dry cleaning process, then it’s an automatic Phase II requirement to go out and test to see if there has been an impact.” The site might turn out not to have any remaining chemicals, but SBA is likely to want that Phase II test just to make sure.
Just like any ESA, an Environmental Professional from an engineering and environmental firm would perform the Phase II ESA. The professional should have at least one of these qualifications:
According to Fargerness, in an initial sale, the borrower pays for the environmental site assessment. Sometimes this expense will be included in the cost of the loan. In a refinance, the current owner would pay for the tests.
According to All American Environmental, a Phase 2 Assessment can take up to four weeks total, including the report.
Fagerness explained that Phase 2 assessments are good as long as the rules and regulations they were performed under remain current, and there’s been no changes to the site in question. In some jursidictions a Phase 2 from two years ago can remain valid if there were no changes to the regulations and procedures it was performed under. Nonetheless, the government recommends inspecting at least once every 180 days. According to the EPA, “If redevelopment plans change or more than 180 days have passed since the Environmental Site Assessment, additional assessment may be needed…Additional assessment gives confidence to the community and investors and ensures a safe reuse.”
The cost of a Phase 2 assessment depends on the complexity of the tests required. According to Alpha Environmental, an engineering firm that performs a variety of environmental tests and risk assessments, the cost for a Phase 2 ESA varies widely depending on the particular property, site and the results of the Phase 1. They wrote, “Factors like the types of analyses needed, drilling methods, access to the subsurface, groundwater testing, overhead constraints, etc., are all taken into consideration. Just the due diligence on a Phase 2 ESA can range from $4,000 to $25,000.” Fagerness concurred and said that the cost depends on the amount and complexity of the tests. A subsurface investigation for a dry cleaners site might be $3,000-5,000 and take just a few hours. But soil, air, drilling, boring, and other sampling for a more complex site can, in his experience, run closer to $20,000-25,000. This is the case if groundwater sampling is involved. If it requires extensive drill rigs and multiple crews, Fagerness continued, it can “take multiple days and could cost several or many tens of thousands of dollars.”
If a Phase 2 assessment reveals no contamination or release of toxic chemicals, you won’t need further testing. If additional contamination is found during a Phase 2 Environmental Site Assessment, your property may still be viable for construction, but you’ll have to take additional steps to ensure site safety before you can proceed. Here are a couple of options.
If the environmental site assessment reveals that extensive remediation is required, and neither the borrower nor lender is in a position to fund all or part of the process, the borrower can look into a state or local voluntary cleanup program that will provide grant funding and technical assistance. With guidelines from the Environmental Protection Agency, state and local agencies can work with developers to devise a plan and secure funding for cleanup. Fagerness often recommends to clients that they check with local regulators to make sure any next steps are in accordance with local regulations.
Some firms will also perform a Phase 3 Environmental Assessment, but only if the results of Phase 1 and Phase 2 assessments warrant a cleanup plan. The time, effort and cost for carrying out this plan varies widely. You might be cleaning up a minor amount of contamination in soil, or remediating the impacts of a large, years-old chemical spill. The goal is to get the levels of any toxic chemicals eliminated entirely or at least down to levels that will be acceptable to local and national regulators.
Every Phase 2 is different, and its processes will be tailored to meet the specifications of the project. It’s hard to say exactly what all the components will be. The structure depends on the conditions of the property. As Fagerness explained, “It could be as simple as, ‘Hey, I’m going to collect indoor air samples at the site to see if there’s any potential impact from the building materials or potential subsurface vapor intrusion concern.’ That would be probably the simplest type of Phase II, but then you can have very comprehensive Phase II’s that include sampling across multiple media.”
Nonetheless, there is a baseline of what you can expect: .
Just as with Phase 1 assessments, Phase 2 assessments are performed to ensure the lender has all the information they need before making the loan, and that the buyer won’t be faced with any unpleasant surprises during construction. As with Phase 1 assessments, it’s important to do a necessary Phase 2 as early in the development process as possible. As Ensafe, an environmental firm explained, “Phase II ESAs are typically conducted prior to purchase or transfer of a property but may also be conducted for an existing owner. That way, if environmental contamination is identified, the purchaser can make an informed decision regarding their willingness to manage identified risks associated with the property.” This information helps the purchaser and the lender avoid unexpected liabilities.