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Environmental Studies in CRE: When Do You Need One, and What All Do They Entail?

Don't take on the risks of buying commercial real estate with unknown environmental issues. Find out what's involved in an environmental study to protect yourself and your property.

[Updated: Feb 04, 2021 ] Mar 31, 2020 by Kevin Vandenboss
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What is an environmental study?

An environmental study looks for evidence of any soil, water, or air contamination on a piece of commercial real estate. The environmental study is done by a qualified environmental engineer, and to the standards set by ASTM International. The study is used to determine whether a property is contaminated and to develop a plan to deal with any contamination.

When do you need one?

An environmental study is done as a part of your due diligence when purchasing commercial real estate. Completing an environmental study will limit the amount of liability you have on any contamination from a previous owner. Without the study, there is no way to tell for certain whether any contamination was caused by you or a previous owner.

Most lenders require the borrower to have an environmental study done as a condition to approve the loan. Whether the bank funds the loan isn't necessarily dependent on the results of the study. In most cases, the lender requires the environmental study to protect themselves from any liability that could make them responsible for an expensive cleanup if they had to take possession of the property.

What do they entail?

An environmental study is done in multiple phases, depending on the findings of each one. If there's no evidence of contamination in the first phase, there's no need to continue exploring further.

Environmental transaction screen

The environmental transaction screen is a voluntary study meant to identify any potential concerns. These types of studies aren't meant to satisfy lender requirements and should only be done on properties that are at low-risk for having contamination.

Phase I Environmental Site Assessment

A phase I is where the process starts on an environmental study. This involves a review of property records to look for any present or past uses that may have caused contamination. This may include a gas station on or next to the property, a dry cleaning business, or even a farm that may have had underground fuel storage tanks.

The assessment also includes a physical site inspection. The environmental consultant will look for any signs of contamination or evidence of anything that could have potentially caused any.

The consultant will interview the property owner and possibly the neighbors, local health department, and fire department as well as petroleum tank management associations.

If the assessment finds that there is no reason to believe there is any contamination on the site, the environmental company will issue their report stating they didn't find any evidence of contamination, and the study is completed.

If any evidence points to a concern for possible contamination, the environmental study will have to continue on to phase II to look for actual contamination.

Phase II Environmental Site Assessment

During a phase II assessment, the environmental engineer looks for evidence of actual contamination. Depending on the actual site, and what they discovered in the phase I, the phase II may include:

  • Soil borings.
  • Monitoring wells.
  • Vapor intrusion assessments.
  • Sampling of soil, groundwater, sediments, surface water, and air.
  • Ground penetrating radar.

If the phase II assessment doesn't uncover any contamination, the environmental company will issue their report at this point and the study is complete.

If contamination has been found, they will have to proceed to phase III to determine the level of contamination and how far it has spread.

Phase III Environmental Site Assessment

The purpose of the phase III assessment is to determine the extent of the contamination and how far it has spread. This is a much more detailed and expensive process than the phase I or phase II assessment.

The phase III assessment may include:

  • Groundwater testing.
  • Subsurface soil assessments.
  • Sediment testing.
  • Assessing pathway of contaminants in groundwater and soil.

The phase III assessment will give the parties involved the information they need to develop a plan of remediation, whether this involves cleanup or measures to prevent further contamination.

Depending on the findings of a phase III assessment, it is not uncommon for the state's department of environmental quality to place deed restrictions on the property. These deed restrictions are put in place to protect the community by limiting the types of use and any construction that can be done on the site.

The bottom line

Buyers often look at the environmental study requirement as an expensive and inconvenient hurdle to completing their real estate purchase. However, the liability that comes with buying contaminated property can become much more expensive than the property itself. Not to mention that unknown sources of contamination can continue to pollute the soil and groundwater if they aren't discovered. This can have an extremely negative impact on the community and the environment.

Conducting an environmental study is a necessary part of a commercial real estate transaction. Before starting your due diligence, you should be prepared for an unexpected surprise and know how you're going to handle it.

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