By Douglas A. Olson, P.E.
Has your lender required you to have a Phase I environmental site assessment (ESA) conducted on your self-storage facility? Are you are thinking about conducting an ESA on a property you might like to acquire? This article will provide you with a general overview of environmental due diligence, the components of an ESA, the ESA process, and general pricing and timing.
The reason typically given for conducting a Phase I ESA is the potential property-owner liability created by the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), also known as "Superfund." CERCLA liability for the cleanup of hazardous substances lies with the current property owner unless, at the time of acquisition, he did not believe--or have any reason to believe--that hazardous substances had been or may have been released on the property. In order to safeguard himself from CERCLA liability, a property owner must establish the defense that he had no reason to know of an actual or threatened release of a hazardous substance on his property. To do this, CERCLA requires he undertake, at the time of acquisition, "all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial practice in an effort to minimize liability."
Obviously, lenders do not want to loan on an environmentally impaired property due to liability under CERCLA as it may effect their exit; however, there are additional reasons to conduct ESAs. For example, CERCLA excludes petroleum products and asbestos, often the most common causes of environmental contamination. There may also be potential environmental liability on a state or local level. A mandated environmental cleanup by a government agency will likely impact your self-storage income stream, which may be tight to start with. Moreover, contamination identified during site development can substantially increase your hard and soft construction costs. Finally, on-site contamination can significantly impact or negate your exit strategy.
The ASTM Standard Industry Practice
Initially, there were no established standards for conducting Phase I ESAs. Many banks, insurance companies, governmental agencies, REITs, etc., had their own unique protocols for conducting such assessments. But varying levels of inquiry and formats made comparison of reports difficult; Phase I assessments would vary from a single-page letter report for $250 to and in-depth study costing thousands of dollars. In order to provide a level of consistency, the American Society for Testing and Materials (ASTM) created industrywide standards in 1989.
The result of the ASTM's efforts was the creation of E 1527 (Phase I Standard) and E 1528 (Property Transaction Screening). These standards meet the requirements of "appropriate inquiry" established under CERCLA and are now considered the industry standard and good, customary practice. However, there are potential items of environmental concern that are not addressed under the ASTM Standard.
An analysis or discussion of wetlands, which may impact the amount of your site that can be developed, is not required under the ASTM standards. Moreover, asbestos and lead-based paint, items of potential environmental concern that may significantly impact construction costs of a building's conversion to self-storage, are not addressed by the ASTM standards. You should establish the scope of the Phase I with your environmental consultant. Often, this will result in conducting a Phase I in accordance with ASTM Standard E 1527 enhanced for an analysis of wetlands, asbestos-containing materials and lead-based paint.
The Phase I ESA Process E 1527-00
The purpose of the Phase I standard is to identify recognized environmental conditions in connection with a property using the methodology recommended by the ASTM. The objective is for the property owner to qualify for the innocent-landowner defense against CERCLA liability, or to help understand potential environmental conditions that could materially impact the operation of the business associated with the property.
Recognized environmental conditions are defined by ASTM Standard E 1527-00 as: the presence or likely presence of any hazardous substances or petroleum products on property under conditions that indicated 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. The term includes hazardous substances or petroleum products even under conditions in compliance with laws. The term is not intended to include de minimis conditions that generally do not present a material risk of harm to public health or the environment and that generally would not be the subject of an enforcement action if brought to the attention of appropriate governmental agencies.
The ESA process essentially consists of four components: records review, site visit, interviews and report preparation:
The records review consists of the reviewing of records maintained in certain governmental regulatory databases, and the review of historic, topographic and hydrogeologic information. The governmental-database review includes the review of federal and state regulatory databases such as lists of leaking, underground storage tanks. The lists are reviewed to determine whether the subject property--or surrounding properties within a defined distance of the subject property--has known environmental conditions such as a leaking, underground storage tank.
The history of the site is analyzed to determine whether former site usage or the historic usage of nearby properties have resulted in environmental degradation of the site. Essentially, the ASTM Standard E 1527 requires the history of a site be determined back to the earliest of either 1940 or the site's first developed use.
The site-visit portion of the process includes a site reconnaissance of the subject and nearby properties. The purpose is to characterize the on-site conditions and obtain visual evidence of recognized environmental conditions that may impact the subject property.
Interviews are often overlooked, but are an integral part of the site assessment. This portion of the process should not be "skimped on" as people knowledgeable of the site and/or its environs can be an invaluable source of information. Interviews should be held with current and former property owners, tenants, neighbors and local and state regulatory agencies. The interviews should be documented in the report along with the interviewee's title, affiliation and phone number.
Finally, the findings and conclusions are assembled with the supporting documentation in a report. Although providing recommendations is not required, the report should include recommendations and cost estimates. In any event, the inclusion of recommendations should be discussed with the environmental consultant at the start of the assignment.
The Transaction Screening E 1528-00
The transaction screening, ASTM Standard E 1528, is typically conducted on smaller loans--usually those ranging in size from $250,000 to $1 million--because the lender has less exposure. It is much easier to write-off a $500,000 loan than a $5million one. However, inasmuch as environmental remediation costs are based on the size, level, type of contamination and the media impacted, and not the purchase price of the property or the amount of the mortgage, I do not recommend transaction screens for those taking any equity position in of a property.
The transaction screening consists of three steps:
- The completion of an ASTM-designed environmental questionnaire regarding current and past uses of the property and surrounding sites;
- An inquiry and review of governmental records and specific historical sources pertaining to hazardous-waste activity on or near the property; and
- A site reconnaissance and visual inspection.
The checklist or questionnaire is to be filled out by at least three parties, usually the owner, the occupant and the person conducting the assessment. Since the transaction screening is not as thorough as a Phase I ESA, the site will often fail the transaction-screen process, resulting in a recommendation to conduct a full Phase I ESA.
Timing and Costs
Typically, the cost of a Phase I ESA ranges between $1,500 and $2,500 for a standard turnaround time depending on the location, size and complexity of the site. Turnaround times range from two to three weeks, with three weeks being the norm. Transaction screens range in price from $500 to $1,200, and can usually be completed within one to two weeks.
When choosing a consultant, make sure his report will be acceptable to the lender, that he has at least $2 million in Errors and Omission insurance, and he has the depth to follow up on any potential recognized environmental conditions he identifies.
Douglas A. Olson, P.E., manages the Phase I environmental site-assessment department at IVI Environmental Inc., a full-service environmental-engineering firm. IVI is a recognized firm headquartered in White Plains, N.Y., with branch offices in Washington, D.C., Miami, Dallas and Los Angeles. The company, which has extensive experience with investment banks, the CMBS market and rating agencies, conducts more than 1,200 Phase Is per year on behalf of developers, owners, buyers, lenders and insurance companies. In addition, IVI's Phase II and Phase III departments and asbestos department conduct investigations, and remediations and abatements throughout the United States. Mr. Douglas can be reached at 914.694.9600; e-mail [email protected]