Phase 1 environmental site assessments are a valuable tool for commercial real estate brokers. Phase 1 ESAs can help brokers determine the usability of a property, which will help protect your company and your client. Such reports are also useful for valuing a piece of commercial land to help structure a deal.
However, there is a lot of information in a Phase 1 ESA. One of the most important components that you need to be aware of is called ASTM recognized environmental conditions or RECs. Let’s dive into RECs so that you can quickly find critical information about the condition of a given piece of property.
What Are Recognized Environmental Conditions (RECs)?
Recognized environmental conditions (RECs) are site conditions that might be hazardous to the land or people. These conditions are alternatively referred to as recognized environmental concerns in some instances. RECs are defined by ASTM standard E1527-21. The standard has been in place since 2013.
To be considered a REC, a substance or piece of equipment must contain petroleum or harmful substances and have been released into the environment, be likely to be released into the environment in the future, or pose a material threat of future release.
RECs can be present either above ground or underground. A few examples of above-ground RECs include:
- 55-gallon drums
- Miscellaneous containers
- Pipes
- Spills
The most common underground RECs are buried storage tanks. Tanks that are used to store fuel for gas stations are a prime example.
RECs and Phase 1 ESAs
Phase 1 ESAs are the primary means of discovering RECs. In fact, that is the main purpose of this assessment. Phase 1 ESAs break down RECs into several categories, which include the following:
1. REC
REC is a general term used to describe the presence of any petroleum product or hazardous chemical. However, the ASTM standard E1527-21 breaks RECs down into sub-categories.
2. CREC
CRECs are past releases or spills. These spills have been cleaned up in a manner consistent with relevant guidelines. There may still be use restrictions with CRECs, but the new land owner will not have to conduct further clean-up.
3. HREC
HRECs are also past releases or spills. However, RECs in this category have been cleaned up more thoroughly. As a result, the land has no use restrictions.
4. De Minimis Condition
De minimis conditions are other property conditions that can be listed in an ESA. These conditions are not RECs and should have no impact on a land’s usability.
What’s the Most Important Part of a Phase 1 ESA?
The RECs and conditions listed above are key parts of a Phase 1 ESA. However, they may not be the most important parts for buyers or sellers. That distinction goes to a section of the report known as “Business Environmental Risk” (BER).
BER includes risks that can have an impact on a business. Assessors compare known RECs with the current or planned use of the parcel. If known RECs would impact that intended use, that fact will be documented in the BER section of the report.
For example, let’s say that your client wants to buy commercial land to build apartments. The land has CRECs with use restrictions. Namely, the parcel cannot be used to create housing due to past spills. In order to use the land, the client will need to pay for remediation. The remediation could cost thousands and take years to complete.
In this scenario, buying the land may not be the right move for your client. If they decide to buy anyway, they will need to negotiate the price down. This discount will help offset some costs of remediation.
What Should Brokers/Loan Officers Look for in Phase 1 ESAs?
Loan officers should focus on a few key parts of a Phase 1 ESA report. There is no need to read the entire report, especially since these reports are usually a few hundred pages. Instead, loan officers should pay attention to the following sections:
- Introduction
- RECs
- CRECs
- HRECs
- BER
- Summary
The above sections contain the most pertinent info for brokers and loan officers. They can use this data to help clients make wise buying decisions.
When Are Phase 2 ESAs Necessary?
If there are red flags in the Phase 1 ESA, then you may need to advance to a Phase 2 ESA. The reasons why you would need to take the next step include the following:
- Intended use of the parcel
- History of the land
- Previous uses
- Whether CRECs are present
- What restrictions are in place
Generally, if CRECs are discovered, a Phase 2 ESA is recommended. Phase 1 ESAs will locate RECs and uncover use restrictions. Phase 2 ESAs determine the severity of the contamination. These reports also help estimate the cost of remediation.
Phase 1 and Phase 2 ESAs are vital during commercial real estate transactions. These reports will help buyers pay a fair price for the land. They also assist with protecting buyers from liability.
If no ESA is performed and RECs are found later, the new owner will be responsible for them. This discovery could hurt the value of the land or ruin a buyer’s project altogether, given the high costs of remediation.
It is impossible to predict remediation costs without a Phase 2 ESA. The report will detail what remediation is needed and offer cost estimates as well. One of the most common types of remediation is backfilling, where remediators remove contaminated soil and replace it with clean soil.
Why Real Estate Professionals Need a Partner Like RSB Environmental
Working with a partner like RSB Environmental offers several benefits. First, we can help you protect your clients. This protection is one of your top priorities, and ours as well.
Also, you can use Phase 1 ESAs to protect your financial institution. Phase 1 ESAs will allow the bank to avoid financing land deals involving contaminated parcels.
The right Phase 1 ESAs can save your deals as well. If a buyer sees RECs, they may be tempted to back out of a deal. However, if a Phase 1 ESA report reveals that the concerns fall into the category of HRECs, the buyer will have far less apprehension.
When you have concerns about a property or need to know more about an ASTM recognized environmental condition, RSB Environmental is the team you can trust to get to the bottom of these potential issues.
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