by Erika Petty
11:44 am in Environmental Due Diligence, Real Estate by Erika Petty
Check out our video on Phase I Environmental Site Assessments (ESAs) here.
This brief educational video covers the purpose of a Phase I ESA, the ESA process and what is included in a Phase I Report. We hope this is helful to commercial real estate professionals, especially those who may be new to ESAs!
2:10 pm in Environmental Due Diligence by Kelly McMicken
Fannie Mae has come out with an update to Form 4262. Some of the changes that are now included is a seperate worksheet to ”Insert Brochures or Documents.” To view the the worksheet go to Partner Engineering and Science’s Fannie Mae page.
10:24 am in Environmental Due Diligence by Gary Reynolds
Since the latest revision to SBA’s SOP 5010 5 (C), that came out in October 2010, I have been asked some reoccurring questions in regards to the Environmental Requirements on 504 and 7a loans.
One of those reoccurring questions is when there is a NAICS Codes match does it mean that I will have to have a Phase I AAI Compliant ESA? The answer to this is a definitive YES, and NO!
Take a look at SOP 5010 5 (C) pg 357 -358, Appendix 4: NAICS CODES OF ENVIRONMENTALLY SENSITIVE INDUSTRIES. If your property matches up to one of those NAICS codes you would be required to have a Phase I ESA performed if (and that’s a big “if”) you’ve read the little notes accompanying the NAICS code. Let’s say you have a Motor Vehicle and Parts Dealer – NAICS code match 441. You would assume that a Phase I would be required – however if you read what Appendix 4 says you would read (if service bays present).
Many dealerships are just car lots without service bays and therefore wouldn’t require a Phase I. Based on the dollar amount of the loan SBA would require only a Records Search with Risk Assessment, or perhaps if the loan was small enough (under $150,000) SBA would only require an Environmental Questionnaire.
What’s important is to read the accompanying notes in Appendix 4: NAICS CODES OF ENVIRONMENTALLY SENSITIVE INDUSTRIES to determine whether or not you will be required to engage a full Phase 1 Environmental Site Assessment.
The next time you need to turn to the NAICS Code listing just let your eyes search through to the italicized notes in parenthesis within the document to see how many exceptions there really are.
I’ve also had calls requesting a Phase I for a property the borrower was constructing a gas station on. If the property wasn’t a prior gas station (or NAICS code match) then again the requirement would be a Records Search with Risk Assessment, or, an Environmental Questionnaire if the loan was under $150,000.
If you need assistance in determining the level of environmental due diligence that’s required on your property, Partner Engineering and Science, Inc. would be more than happy to assist.
10:03 am in Commercial Real Estate Finance, Environmental Due Diligence, Fannie Mae, Freddie Mac/Fannie Mae, Multi-Family, SBA Real Estate Finance by Joe Derhake, PE
The Phase 1 Environmental Site Assessment is a report that illuminates the environmental liability associated with a real estate asset. A Phase 1 Environmental Site Assessment (ESA) is required by lenders during the financing of commercial real estate. The environmental consultant providing the Phase 1 ESA is required to inspect the property, review historical records on the property and research records available at government agencies. This information is evaluated and an opinion is made as to whether past or present activities may have caused contamination of the soil or groundwater at the subject property.
In the event that the Phase 1 ESA uncovers a recognized environmental condition (REC)*, the environmental consultant will typically recommend a Phase 2 Environmental Site Assessment, which involves invasive soil or groundwater testing. The geologist or engineer designing the Phase 2 Environmental Testing scope of work will rely on the Phase 1 Environmental Report to understand Areas of Concern and Chemicals of Concern.
In 1993 the American Society for Testing and Materials (ASTM) published the first ASTM Standard: ASTM E1527-93 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process. Since then the standard has been updated several times, with the most recent update occurring on in 2005.
The ASTM E1527-05 standard outlines the purpose and use of the Phase 1 ESA as well as the scope of work to be conducted, including: records review (historical and governmental records); site reconnaissance (inspection of the property and adjacent sites); interviews (with owners and occupants and local government officials); evaluation and report preparation.
Certain items are considered out of the scope of work for an ASTM Phase 1 ESA, such as asbestos, lead-based-paint (LBP), mold and radon; however, many consultants take these potential concerns into consideration during the Phase 1 process (discussed further below).
Federal law requires purchasers of real estate to do “all appropriate inquiry” to qualify for the innocent landowner defense under CERCLA*. Ordering a third party Phase 1 Environmental Site Assessment has traditionally been the method by which landowners qualify for the all appropriate inquiry standard. In 2005, the EPA published its final rule on requirements for all appropriate inquiry.
To a large extent the all appropriate inquiry (AAI) standard for Phase 1 Environmental Site Assessments mimicked the existing ASTM E1527-00 Standard. The new AAI Standard for Phase 1 Environmental Site Assessments required a few new scope items, including:
1) A more stringent definition of who qualifies as an Environmental Professional*, the person under which an AAI Phase 1 ESA must be conducted
2) The AAI Phase 1 ESA allows either the user or the environmental professional perform a search for environmental liens (however the updated ASMT E1527-05 standard designates this as the user’s responsibility)
3) Mandatory interviews, some of which were not previously mandatory
4) Documentation of data gaps or uncertainties
To a large extent the industry quickly adapted the AAI ruling for Phase 1 ESAs, which went into effect on November 1, 2006. In 2005 the ASTM E1527 standard updated to include the major elements of the final AAI ruling. The one exception is the environmental lien search requirement. Many lenders have developed a “business risk” scope of work for Phase 1 Environmental Site Assessments that exclude the environmental lien search, as the environmental lien search is considered by some to not be worth the extra cost.
Today the EPA recognizes two ASTM standards as being AAI compliant: the ASTM 1527-05 Standard, as well as ASTM E2247-08 Standard, discussed below.
An additional ASTM standard for conducting Phase 1 ESAs was created in 2008 specifically for large tracts of primarily undeveloped land: ASTM E2247-08 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process for Forestland or Rural Property. The standard is very similar to the E1527-05 standard, with a few key exceptions: the approach to site reconnaissance (makes provisions for limited inspection/access), the regulatory records search (additional records requirements) and historical sources (fewer “standard” sources).
Most buyers must do the Phase 1 Environmental Study for a loan and many lenders and government agencies have developed custom scopes for work for Phase 1 Environmental Site Assessments. A few examples are below:
The US Small Business Association (SBA) requires an environmental investigation of all commercial real estate loans, and has specific requirements for what kind of investigation is required and when. The requirements are based on a property’s environmental risk (determined by its NAICS Code*). Some of the main particular requirements are:
- Environmental Questionnaires and/or Records Search with Risk Assessments (RSRAs) are required on “lower risk” sites (no NAICS Code match)
- “Higher risk” sites (with NAICS Code matches), must do a Phase 1 to start, except for “Car Wash Only Facilities”, which must do an Environmental Transaction Screen to start
- Requirements for gas stations: Phase 1 and equipment testing compliance review
- Requirements for dry cleaners: Phase 1, and automatic Phase 2 if the facility is 5 years or older
- Requirements for pre-1980 day cares/schools/residential care facilities: lead-based-paint risk assessment and lead testing in drinking water
- Phase 2s on gas stations and dry cleaners must be conducted by an environmental professional with a current professional geologist’s or engineer’s license
- Require the consultant to grant the SBA reliance on the reports
The SBA generally recognizes the ASTM Standards for conducting Phase 1 ESAs. Each October the SBA releases any new changes or updates to its standard operating procedures.
Fannie Mae has specific requirements for Phase 1 ESAs on its loans, which are detailed in the Environmental Hazard Management Procedures and Sections 209-310 of the Fannie Mae Guide. Fannie Mae generally recognizes the ASTM Standards for Phase 1s with some modifications, the main components of which are:
- Site inspection is required to cover 10% of a property’s units, and 50% of any down units
- Requires testing for asbestos, lead and radon in some circumstances:
Freddie Mac environmental assessments are conducted in accordance with the Freddie Mac Multifamily Seller/Servicer Guide and Chapter 14, “Environmental Requirements.” Freddie Mac generally recognizes the ASTM Standards for Phase 1s with some modifications, the main components of which are:
- Site inspection is required to cover 10% of a property’s units, and 50% of any down units
- Check for State Super Lien Law, which would allow the state to place a first priority lien on a property in response to contamination
- Requires testing for asbestos, lead-based-paint (LBP), mold and radon in some circumstances:
HUD requires ASTM Phase 1 ESAs with additional Environmental Reviews (HUD Form 4128), which go well beyond the ASTM requirements. The 4128 Form covers a range of potential impacts of a project including:
- Zoning
- Air quality
- Coastal barrier resources
- Floodplains/wetlands and other natural features
- Historic preservation
- Noise abatement
- Hazardous operations/toxic and radioactive chemicals (determined by the Phase 1)
- A range of other concerns regarding the site location, suitability, stability, social/municipal services and transportation
If a potential issue is identified in the 4128 checklist, then further study may be required, such as formal Noise Surveys for properties in potential high-noise zones (an initial noise analysis is required on all projects).
During the environmental review process, HUD also goes beyond ASTM by requiring lead paint surveys or Operations & Maintenance Plans (based on the age of the property), and vapor encroachment screenings (for all projects).
Phase 1 ESAs done during pre-foreclosure process are similar to normal Phase 1s; however, strict adherence to the AAI/ASTM requirements is critical in order to maintain the secured creditor exemption or innocent landowner defense under CERCLA. This includes conducting an Environmental Lien and/or Chain of Title search, which many lenders forego at loan origination. Some other concerns to consider:
- Site access can be difficult due to recalcitrant site contacts
- Asbestos, lead paint, radon, mold and other non-scope issues must be managed in order to maintain an assets’ safety and value
- Erosion control at unfinished construction sites and other compliance concerns (not covered by AAI/ASTM)
- A lender should evaluate any potential environmental liability and cleanup costs in comparison with the asset value when deciding whether to foreclose
ASTM E1527-2005 recognizes several common additional scope items. In our practice of environmental due diligence, we find that a lot of our clients are interested in investigation other environmental concerns under the cover of the Phase 1 Environmental Site Assessment. The most commons additional scope items are:
1) Asbestos Survey: an asbestos survey is particularly important to buyers of old buildings or buyers who plan to demolish the buildings;
2) Lead Paint Surveys: important in residential settings, for schools, and when a building is going to be demolished;
3) Environmental Compliance Audits: clients buying complex industrial operations are concerned about recognized environmental conditions as defined by ASTM E1527 as well as material non-compliant practices. A Phase 1 ESA/Compliance Audit is the best way to understand all of the environmental liabilities associated with a manufacturing facility.
4) Mold Survey: common for residential and hotels users of our service;
5) Indoor Air Quality Survey: common for high end office buyers and hotel buyers;
6) Phase 2 Environmental Site Assessment: clients buying property with known environmental concerns may want to do the Phase 1 & 2 Environmental concurrently.
For any questions on Phase 1 Environmental Site Assessments feel free to contact me or our Nicole Moore, our Technical Director of Environmental Due Diligence at 800-801-4923.
*A REC is defined as “the presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release, or a material threat of a release of any hazardous substances or petroleum products into structures on the property or into the ground, ground water, or surface water of the property.”
*CERCLA stands for Comprehensive Environmental Response, Compensation and Liability Act, commonly known as the Superfund law
*Environmental Professional: Someone who possesses sufficient specific education, training and experience necessary to exercise professional judgment to develop opinions and conclusions regarding conditions indicative of releases or threatened releases of hazardous substances (or petroleum products) on, at, in or to a property. An EP must have:
- A state or tribal issued certification or license and 3 years of relevant full-time experience; or
- A Baccalaureate degree or higher in science or engineering and 5 years of relevant full-time work experience; or
- 10 years of relevant full-time work experience.
*NAICS Code: North American Industry Classification System. The SBA maintains a list of NAICS Codes of environmentally sensitive industries.
12:16 pm in Environmental Due Diligence by Joe Derhake, PE
I had the good fortune of moderating a panel at the Environmental Bankers Association (EBA) January Conference on the subject of QA/QC of Phase I Environmental Site Assessments and the entire environmental management process during underwriting.
The premise of the panel was to study error in order to make future environmental due diligence better. Senior credit officers are asking the environmental risk managers: How did this REC site slip through the cracks (or did it)? Why are we having to do Phase II Environmental Testing on fully underwritten loans?
The panel provided tremendous insight into better technique in environmental risk management. My take-aways from the EBA panel discussion were the following:
During the question and answer secession, Mike Kulka asked if any lenders in the room had sued a consultant that had completed a bad report. No lenders cited an example. The implication of his question was that an occasional lawsuit might force the worst proprietors of Phase I ESAs out of the field. I certainly share Mike’s frustration with having to compete with unregistered and less experienced professionals.
The overall message was that our industry had successfully reduced environmental loss considerably, but that there was plenty of room for improvement. Finally, a sound environmental policy is as important as a good environmental consultant.
6:43 pm in Environmental Due Diligence by Gary Reynolds
In accordance to SBA’s SOP 5010 5 (C), when obtaining a 504 or 7a Loan SBA requires an Environmental Investigation of all commercial Property upon which a security interest such as a mortgage, deed of trust, or leasehold deed of trust is offered as security for a loan or debenture. The type and depth of an Environmental Investigation to be performed varies with the risks of Contamination.
Here is a simple “Steps of Environmental Investigation” flowchart describing what level of report would be required based upon the property site’s NAICS (North American Industry Classification System) Code .
For more information regarding SBA Environmental Due Diligence requirements, or the complete Standard Operating Procedures created by the U.S. Small Business Administration visit http://ftp.sbaonline.sba.gov/idc/groups/public/documents/sba_homepage/serv_sops_50105_c.pdf
8:37 am in Environmental Due Diligence by Gary Reynolds
You’ve been told you need to have a Phase I Environmental Site Assessment (ESA) and now may be looking for answers to the questions:
The purpose of an Environmental Site Assessment (ESA) is to identify any existing environmental contamination on the subject property. You as a buyer do not want to unwillingly become financially responsible for the prior environmental practices on the subject property. An ESA saves you from assuming liability for existing contamination and the costs of remediation (if needed). A Phase I ESA provides a current and historical record search as well as a site visit and inspection by a trained and certified Environmental Professional. The Environmental Professional’s job is to provide you with a report of the property site that informs you that either the site is clean, or there are Recognized Environmental Conditions (REC’s) that exist.
Your banker can suggest some names of Environmental Firms that are on the bank’s approved lists. In cases where no recommendations are given, you can search the Internet for Phase I Environmental Site Assessments.
Typically you can expect to pay between $2,000 and $3,000 depending on the property.
The average turn around time for a Phase I Environmental Site Assessment is three (3) to four (4) weeks. Many firms can provide rush jobs as well.
The Phase I Environmental Site Assessment performed in accordance with ASTM 1527 05 does meet the environmental requirements of the U.S. Small Business Administration.
7:14 am in Commercial Real Estate Finance, Environmental Due Diligence by Kelly McMicken
If you are buying a commercial property, you need to do environmental due diligence. The gold standard for due diligence is the Phase I Environmental Site Assessment. The Phase I ESA is basically a research project into the properties current and past use and how these uses could potentially affect the environment. As a buyer, you want to make sure that you don’t get stuck cleaning up someone else’s environmental mess, so the ASTM 1527-05 Phase I ESA is the most appropriate tool.
For Lenders however, the full Phase I Environmental Report is not always warranted particularly for smaller or less risky transactions. Our lender clients sometimes ask for environmental reports that are less comprehensive and expensive than the Phase I ESA. A few options that are available are:
Environmental Transaction Screen: The Environmental Transaction Screen consists of a Site Visit by an environmental professional, the review of an environmental database report, and very limited historical research. The Environmental Transaction Screen is about half the price of the Phase I ESA and has a scope of work defined by ASTM E1528-06.
Environmental Database Reports: The Environmental Database Report involves the review of an environmental database report by an environmental professional and a short letter report in front of the database. We always recommend that you order these very inexpensive reports from an environmental professional instead of directly from a database company, as what is really valuable is the professional advice.
Records Search and Risk Assessment: The Records Search and Risk Assessment (RSRA) involves the review of an environmental database and historical sources. The report must be done by an environmental professional. This scope of work is recognized by the Small Business Administration (SBA).
I hope this helps commercial property buyers and lenders make good decisions.
by Thomas Hill
9:49 am in Commercial Real Estate Finance, Environmental Due Diligence, Fannie Mae, Multi-Family, Real Estate by Thomas Hill
A property inspection, also known as a Physical Needs Assessment (PNA), is one of the first steps in an equity or transfer of ownership lending transaction involving Fannie Mae as the insurer of the loan. Partner Engineering and Science, Inc. specializes in transactions that Fannie Mae consider their “small loans” division. These are loans that are less than 3 million dollars and are specifically for multifamily properties. Partner provides Fannie Mae an initial assessment of the collateral for the transaction. One of the standardized forms that Fannie Mae reviews, and that we complete as part of our service, is the “Property Assessment Form 4262”. In addition to this form, Partner provides a thorough executive summary of all building systems and features. To complete this, Partner performs a physical inspection of the building and property to assess multiple factors of the overall condition, as well as potential life and safety issues.
This inspection includes, but is not limited to:
Physical Needs Assessments are just one of many services that Partner offers relating to the multifamily property lending industry. In addition to Fannie Mae inspections, Partner offers a plethora of building and environmental services. Partner’s engineers provide our clients with cost effective investigations on a national basis in many different scopes. Please browse our website http://www.partneresi.com/ to review the services we have available.
4:45 am in Environmental Due Diligence by Joe Derhake, PE
Entry by JoeDerhake
When doing Phase I Environmental Site Assessments, sometime the facts are on the border between a recognized environmental condition and an environmental issue. This blog is my latest in a series of borderline decisions.
Here is the scenario: the Phase I ESA finds a classic REC on site. Let’s say we have 15 years of dry cleaners on-site in the 1970s and 1980s—clearly a REC. However, in this instance the site was redeveloped with a high-rise office building with a 3 level subterranean garage in 1988. The construction project necessitates excavating 40 feet from lot-line to lot-line. Assume groundwater is at 80 feet below ground surface.
The environmental professional may point out that the solvent could have penetrated all of the way to groundwater, but the excavation of 40 feet of soil clearly is a significant mitigating event.
Would you as an environmental professional still consider this situation a recognized environmental condition? Would you recommend Phase II Environmental Testing?
Providing our clients with good environmental risk management opinions is a very important part of our job. Please let me know what you think?
Phase I Environmental Site Assessment, Phase I ESA, Environmental Risk Management, Phase II Environmental Testing
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