Digging Up Environmental Problems
A Transaction Screen Process Can Help Determine How Deep Environmental Assessments Should Go.
Nothing can kill a deal faster or make a lender flinch quicker than the mention of environmental concerns.
The basis for that reaction comes from the Comprehensive Environmental Response, Compensation, and Liability Act. In graduate school, environmental science students are told to remember one thing about CERCLA as it relates to real estate: If you buy it, you own it. That means if an environmental problem exists, in all likelihood the purchaser is the new owner of the liability.
Environmental site assessments help commercial real estate professionals and their clients determine whether or not contamination problems exist on a site. A preliminary transaction screen process can help determine if more involved site assessments by an environmental professional are necessary.
Environmental Site Assessments
Some years back, the Small Business Administration foreclosed on a service station in Corpus Christi, Texas, because of a delinquency on a $35,000 mortgage. At the time, little was known about ESAs. The SBA removed the debtor and took over ownership of the service station, including all of the station's leaking underground storage tanks.
Back then, tank removal costs and contamination cleanup ran around $250,000. Assuming the tract was worth $60,000, the SBA lost the $35,000 mortgage balance and incurred $250,000 in cleanup costs for a total loss of $285,000, which would be a catastrophe in the private sector. As a result of similar cases across the country, ESAs evolved.
How do real estate professionals and their clients determine what type of ESA is needed? A transaction screen process, explained later, can help real estate brokers, developers, lenders, and investors determine what type of future action may be necessary.
Generally speaking, environmental professionals group environmental assessments of properties into the following three categories, each with different goals.
Phase 1: Investigation.
Most commercial real estate practitioners probably are familiar with the phase 1 ESA. The American Society for Testing and Materials has standardized suggested procedures for conducting phase 1 ESAs. It also defines the appropriate terminology, the parties qualified to conduct ESAs, and the responsibilities of standard users.
The purpose of a phase 1 ESA “is to identify recognized environmental conditions,” according to its guidelines. “The term recognized environmental conditions means 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.”
Most important, ASTM identifies four main components of an ESA: a records review, site reconnaissance, interviews, and a report.
The records review includes an investigation of deed records, federal and state environmental records, city and county records, fire insurance maps, and other documents that the environmental professional deems pertinent.
Next, a site reconnaissance — an actual inspection of the property — occurs. Observations of adjoining lands are included when possible. It is customary to review aerial photographs and maps before conducting a site reconnaissance to help determine if adjacent properties pose environmental risks. For instance, topographic and flood-plain maps can be useful in assessing the route of possible contaminants during floods.
Current and former property owners routinely are interviewed in phase 1 assessments. Tenants, lessees, and other occupants also are probable candidates for inquiry. Owners and occupants of adjoining properties can be good sources of historic information about the land, including information about its little-known past uses.
Finally, a report brings the data together in meaningful, coherent form. Typically, a report includes the investigative parameters, references and exhibits, the environmental professional's credentials and opinions about any recognized environmental condition encountered, and the findings and conclusions.
While different practices and protocols exist, ESAs also can be tailored to fit a given property or situation. In many cases, non-scope issues may be addressed in the phase 1 stage. These may include such topics as asbestos-containing materials, radon, lead-based paint, lead in drinking water, or wetlands.
Phase 2: Sampling and Analysis.
Like a phase 1 ESA, phase 2 is an investigation, but that's where the similarities end. A phase 2 ESA is an environmental sampling and analysis of the results.
Sampling typically is an investigative tool for examining soil, ground water, surface water, and air. Other sampling exercises test for lead from lead-based paint and asbestos.
Sampling methods and protocols vary. A simple wipe test of dust on the top of an interior window casing may be part of a sampling protocol either for asbestos or lead from lead-based paint. A core sample of pipe wrap or other insulation is appropriate in preparing a suspected asbestos-containing material for electron microscopy. Certain water samples can be taken and analyzed on the spot. Water samples for bacteria, coliforms, and other toxins have different sampling and analytical protocols.
Phase 3: Cleanup.
A phase 3 ESA is the actual remediation or cleanup. The expression usually relates to soil or ground water remediation.
An example of such remediation would be the cleanup of contaminated soil around a leaking underground storage tank. These soils can be incinerated or washed to remove the contaminants and then returned. In other scenarios, the soil may need to be removed.
Another common procedure is using remediation wells to penetrate a contaminated aquifer or ground water reservoir. As in the case of leaking underground storage tanks, the probable pollutants are hydrocarbons. Normally hydrocarbons and water won't mix, similar to oil and vinegar in salad dressings. The liquids are drawn from the aquifer and the offending additives are removed. The treated water then is injected back into the reservoir. Another process includes bioremediation, which is the use of bacteria to render soil toxins inert.
While remediation procedures can be diverse and either simple or complex, they typically are expensive and can be ongoing.
The Transaction Screen Process
Environmental issues and site assessments may seem overwhelming to commercial real estate professionals. Environmental documents use an immense vocabulary of acronyms, scientific names, technical terms, and jargon, as well as protocols and procedures. Libraries of statutes accompany regulations.
Real estate professionals ordinarily do not have the time or interest to wade into this sea of data. However, brokers, developers, lenders, and investors can use a tool to do a preliminary assessment on a tract of land with or without structures.
An ASTM protocol called the transaction screen process includes a copyrighted questionnaire that provides an idea about the environmental condition of a particular piece of real estate. It may be used in determining whether or not a phase 1 or other ESA is necessary. Further, it is useful for briefing an environmental consultant if additional environmental work is being considered. Thus, it can contribute to cost containment. Unlike a phase 1 ESA, a TSP does not require an environmental professional's judgment. The questionnaire is the basis for the entire assessment. All of the questions are answered yes, no, or unknown. The questions are self-explanatory and direct.
Transaction screen process questionnaires are available from ASTM for about $20 per dozen. (Since ASTM does not allow the form to be copied, it is only available through the mail. Contact ASTM at (610) 832-9585.) Also available is the 37-page Standard Practice for Environmental Site Assessments: Transaction Screen Process, which guides the user through the questionnaire and provides a list of definitions and acronyms. The guide costs about $40 and can be downloaded from http://www.astm.org/.
Many of the questions are directed to current or past owners, tenants, or other occupants of the land. Adjacent landowners and anyone who might be familiar with the property also are likely candidates for interviews. Questions relating to a specific site are followed by the same questions as they relate to adjacent tracts of land.
The first set of questions determines if the land or adjoining lands ever had industrial uses, which usually is a concern for potential pollution. A negative answer alleviates those fears.
The next set of questions relates to past or present existence of gasoline stations, motor repair facilities, commercial printing plants, or dry cleaners, which all can be sources of environmental problems. Newer facilities warrant attention but are less likely to have problems.
The questions also ask if the land or adjacent lands ever were used as junkyards, landfills, recycling facilities, or waste treatment, storage, disposal, or processing facilities. From an environmental perspective, the latter operations could result in substantial environmental liabilities causing the properties to have an unrecoverable negative value. Consideration of these types of cases would require extremely close scrutiny. The absence of all of the above would be a good indicator of an uncontaminated site.
Other matters to address include the past or current presence of industrial drums on the property or adjacent properties. Industrial drums have been found with everything inside from human bodies to waste oil to rainwater.
More often than not, the contents of derelict drums are not known. The cost to sample and identify the contents of barrels, place them in appropriate shipping containers, and transport them to the proper facility easily can run from $1,500 to $2,500 each. Thus, a dozen drums could take some of the romance out of small deals. Should the integrity of the drum be compromised, leakage into the ground welcomes a whole new set of headaches.
Moreover, even if a drum is labeled, there is no guarantee that the contents match the label, and drum contents that match their labels still can be a problem. For instance, whether hydraulic fluid is old or new makes a difference. Some of the older fluids containing polychlorinated biphenyls, or PCBs, are exceptionally carcinogenic.
The same cautionary concerns apply to chemical, pesticide, and paint containers of five gallons or more. Discarded automotive or industrial batteries are another red flag suggesting that further investigation may be warranted. The existence or the historical presence of this type of material warrants interviews with occupants or adjacent landowners.
Other questions are fairly straightforward. Is there stained soil on the property? What caused it and how deep is it? The absence of stained soils is a positive indicator for those involved in the real estate transaction.
Another question asks about the presence of distressed vegetation. Dying vegetation can be caused by seasonal changes, climatic conditions, or simply the characteristics of the species. On the other hand, toxins and pollutants can kill vegetation. It is not uncommon to see dead grass or plants near contamination, surrounded by a ring of dying or distressed vegetation, and then surrounded by healthy plants. The presence of dead animals and insects is a good reason to leave the area and call a consultant.
These questions in the TSP questionnaire illustrate the common sense nature and the simplicity of an environmental screening.
The federal government records review for TSP assessments is relatively simple. It includes a check to see if any National Priority List properties are nearby. These properties have the highest priority for cleanup according to the Environmental Protection Agency's hazard ranking system.
This search is done through the Comprehensive Environmental Response, Compensation and Liability, and Information System list, which lists Superfund and NPL sites and can be accessed online at http://www.epa.gov/envirofw/html/cerclis/cerclis_query.html/ using a county or zip code to search.
Other federal records that might be of interest concern Resource Conservation and Recovery Act facilities. RCRA generally relates to hazardous waste generators and handlers. The Resource, Conservation, and Recovery Information System database also provides a geographic search function online at http://www.epa.gov/envirofw/html/rcris/ rcris_query_java.html/.
The federal records questions in the TSP focus on a property's relative location to either CERCLA and NPL sites or RCRA facilities. Often RCRA facilities are encountered, but they can include small-quantity generators that are of little or no consequence to the property being reviewed.
TSP requirements on state records include inquiries of leaking underground storage tanks and solid waste or landfill facilities within a half-mile of the land being screened. The TSP also inquires about the proximity of any state equivalent to CERCLA or NPL sites. While access to state records vary, the information required by the TSP should be readily available from either state or county health departments or state environmental regulatory agencies.
Negative Is Positive
Many times, a TSP turns up all negative answers. Such a finding may suggest that a phase 1 or higher ESA is not necessary. For their own comfort, users always can have an environmental professional review their findings.
The TSP protocol is not an environmental imprimatur for commercial real estate. However, it is an effective tool to aid in assessing environmental risk before proceeding in commercial investment real estate transactions.