Commercial real estate loans can quickly become complicated, as there are many moving parts and large sums of money involved. Plus, all parties involved need to be aware of any environmental issues at the property.
Unfortunately, there is some confusion in the industry about the terminology used to describe an environmental site assessment. We want to clear up the purpose of a Phase 1 environmental study for loans, whether these studies are necessary, and when they would be required.
To help make life easier for property owners, buyers, and commercial real estate lenders, let’s examine why these studies are so important.
What’s a Phase 1 Environmental Study for Loans?
Are you familiar with a Phase 1 environmental site assessment (ESA)? If so, then you are also familiar with Phase 1 environmental studies. The two terms refer to the same thing.
Whether you call them “studies” or “assessments,” Phase 1 ESAs are designed to look for environmental contamination. These concerns are known as recognized environmental conditions or RECs.
RECs are conditions that indicate the presence of hazardous substances or petroleum products. The presence of RECs does not mean a parcel is unusable. However, it does mean that a closer look is required to determine whether contamination has occurred.
If Phase 1 studies uncover RECs, a Phase 2 ESA will need to be booked. A Phase 2 ESA reveals the scope of contamination so that buyers can make smart purchasing decisions.
When Are Phase 1 ESAs Needed?
A Phase 1 ESA should be scheduled anytime commercial property is going to change hands. These assessments are particularly important when transactions involve improved land. However, they should be scheduled for deals involving unimproved parcels as well.
During a Phase 1 study, assessors will complete several steps to search for environmental contamination. Some of the key steps of a Phase 1 study include:
- Reviewing databases to search for past permits
- Reviewing historical transaction data
- Reviewing aerial photographs
- Analyzing local and state agency records
- Interviewing past or current property owners or site employees
- Conducting a site inspection
Cumulatively, the above efforts will help assessors compile a Phase 1 ESA report. The report will reveal everything you need to know about the site’s history. It will also outline whether a Phase 2 ESA is recommended.
What’s Included in a Phase 1 ESA Report?
At first glance, Phase 1 ESA reports can seem overwhelming, as the report will likely include a few hundred pages worth of information. Fortunately, you can use the index at the front of the report to navigate to the most important sections.
– The first section you should examine is the scope and definitions page. This page provides definitions of key terms used in the study. It also outlines the scope of the study. This section will help you and your client understand precisely what was done during the study.
– You should also pay particular attention to the list of RECs. RECs are grouped into several different categories. The two most common are CRECs and HRECs. Both CRECs and HRECs are observed environmental conditions. However, they must be addressed differently.
- A CREC involves a verified spill or hazard. Each CREC has been remediated, but every CREC still has use restrictions that may impact value.
- An HREC also involves a verified hazard or spill. The difference is that the site has been fully remediated. This recognition means that the site has no use restrictions.
- CRECs may diminish property value. HRECs minimally diminish property value, if at all.
– Another section to pay attention to is the business environmental risk (BER) section. In this section, assessors analyze RECs based on the buyer’s intended purpose for the land. This section will help buyers understand how viable the land is for their venture.
Who Does an Environmental Study Protect?
An environmental study protects everyone involved in a deal. However, the study is primarily designed to protect the buyer. If a buyer purchases a parcel with RECs and does not conduct a Phase 1 ESA, they will be responsible for those hazards.
Another buyer concern is land viability. If a parcel cannot be used for a buyer’s intended purpose, they will need to perform extensive remediation. Remediation can take months or even years. It can also be incredibly costly.
A Phase 1 ESA will help buyers determine the appropriate value for the parcel. It will also help them decide whether they will receive a return on investment in the proper time frame.
Phase 1 ESAs also protect you and the financial institution. Your company needs to be able to assess risk accurately before financing a land purchase. This assessment will let the company know if it can recoup its investment in the event that the buyer defaults.
Lastly, Phase 1 ESAs protect sellers. If a parcel has RECs, but they have been properly remediated, the land will be more valuable than a site with unaddressed hazards.
While Phase 1 ESAs benefit all parties involved in the transaction, there can often be challenges when scheduling the assessment. For example, buyers and sellers may not agree on who should pay for the study. This friction worsens if a Phase 2 or Phase 3 ESA is required, as they can be quite costly.
One way to lessen the contention is to work with a reputable and experienced environmental consulting company.
Schedule Your Phase 1 ESA with RSB Environmental
Do you need to book a Phase 1 environmental study for loans involving commercial real estate? If so, then it is vital that you choose the right team for the job. RSB Environmental is that team.
Our team has the knowledge and expertise necessary to protect your client. We will carefully examine the subject parcel to uncover RECs. Any RECs that are discovered will be carefully documented in our ESA report. We will outline what we found and whether a Phase 2 ESA is recommended for your property.
Don’t expose your financial institution or the buyer to undue risk. Instead, book your Phase 1 ESA with RSB Environmental today. To get started, contact us for an initial consultation.