Assessment essentials

• Apr 01, 2000

Since the late 1980s, the environmental statutes and regulations at both state and federal levels have had an increasing impact on buying and selling real estate. Buyers want to know if they are purchasing a contaminated site, and lenders want to know if they are lending money with a property as collateral that would cost millions of dollars to clean up. The possible presence of contaminated soil, surface water or groundwater, hazardous wastes, underground storage tanks or a variety of other environmental problems can affect the value of real property.

In light of the growing impact of environmental laws on real estate, the role of an environmental consultant who performs environmental site assessments has changed considerably over the last decade. When compared to the past 10 years, a much higher percentage of current real estate transactions involve environmentally-impacted properties, partly because the existence of an environmental impact no longer necessarily thwarts the transaction. As a result, it is no longer sufficient simply to gather information and report that information to the client through a Phase 1 environmental site assessment (ESA) report. Instead, the expectation in today's market is that the consultant will identify environmental concerns and present solutions.

It is the consultant's role to judge the significance of environmental impacts as well as the effort in time and money to remedy or limit such impacts. In developing the scope of an ESA, the consultant must combine knowledge of the site with knowledge of the transaction's framework and the effect of potential concerns on the deal's outcome. In addition, the findings of the ESA, and how those findings are presented, often affect a client's negotiating position and how risks are ultimately allocated between the parties to the transaction.

Consulting myths

It is a myth that the well-known American Society for Testing and Materials (ASTM) guidelines for ESAs are an inviolate standard of the industry. The ASTM document may be a good start in developing a scope of work, but the effective consultant must be prepared to modify the ASTM scope to serve the client's objectives. It is important to note that the ASTM practice documents were originally developed as an innocent landowner defense to the liability imposed on owners under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S. Code, sections 9601 to 9675, often referred to as Superfund. As such, the ASTM scope does not necessarily account for business concerns in today's climate and may be based on the faulty premise that an innocent landowner defense still exists. For example, rather than initially performing a full scope ASTM Phase I ESA, it may in some cases be prudent first to thoroughly investigate a known condition which, if unresolved, will by itself preclude the t ransaction.

Intended use

A critical issue in any ESA is the intended use of the property after the transaction has occurred. For example, an environmental condition may be a concern if the site is to be developed with single family homes. That same condition may not be a concern if the site is to be developed as industrial property. Another example is the effect of site grading required by the desired use. Whether the site development will involve excavation and offsite disposal of contaminated soils has substantially different ramifications than if the site development will require fill, and thus no disposal off-site.

Unregulated groundwater contamination may also be a significant environmental concern if it impacts the construction process (such as increasing the cost of dewatering activities). In contrast, if there are no construction activities intended, that same unregulated groundwater condition may be of no concern. In short, if a property is to be redeveloped, it is important for the environmental consultant to recognize the inter-relationship between site development activities and the cost of addressing environmental issues.

Development timing

The timing of regulatory closure and the effect that process has on the client's development plans should also be considered by the environmental consultant. Developments that allow several years for final regulatory closure to occur, involve a completely different analysis of risk and costs than developments that require expedited (and thus more expensive and challenging) regulatory closure. Thus, a developer who is not seeking to sell the property immediately after redevelopment may have different issues than one who will sell the property immediately.

The consultant can also play a critical role in explaining regulatory closure and methods to achieve it. The timetable for obtaining regulatory closure is often based on the regulatory climate at the time and on the personalities of officials within regulatory bodies. The consultant should be aware of steps that need to be taken to accelerate the schedule and reduce the cost of regulatory closure. The consultant should also be prepared to advise the client on future site uses that would limit disruption to existing environmental conditions or that would best take advantage of the regulatory framework. Correspondingly, the consultant should advise the client of uses which may be difficult or impractical because of the environmental condition.

Environmental liability

Many consultants mistakenly assume that environmental liability issues are solely the purview of legal counsel. In fact, the environmental consultant can play a critical role in advising the client on such issues. In turn, the consultant must understand state-specific laws and regulations that impact environmental liability. One illustration is the regulatory liability associated with underground storage tanks. In most states, the owner/operator of an underground storage tank system is liable for releases from that system. As such, removal of the tank prior to closing a transaction can dramatically reduce a purchaser's liability by preventing that purchaser from ever being an owner/operator.

It is also important for the environmental consultant to understand the ramifications of third-party liability. For example, the liability for a groundwater contaminant plume migrating offsite into a landfill or a cemetery is substantially different than that for a plume that is migrating into a neighborhood. Finally, it is important for a consultant to recognize when to advise a client to seek legal counsel.

Client impact

The consultant's recommendations may dramatically affect business decisions. The client's assumption or reallocation of risk will be based on the consultant's advice. Therefore, the consultant must be aware that conclusions related to environmental issues can affect the financial viability of the project or transaction. As such, solid practical advice must not be skewed toward protecting the consultant's liability to the client's detriment.

The drafting of language used in an environmental report can have significant impact on the client. Exaggeration of risk can alter the client's negotiating position. Excessively conservative statements can eliminate the opportunity to obtain financing or to consummate a transaction. Similarly, such statements can harm the owner's ability to sell the property at a later date. It is important for a consultant to recognize that subtle changes in language can have a dramatic impact on the reader's perception of risk.

The environmental consultant must have a combination of good judgment, experience and appreciation of business issues. The consultant is more than just a gatherer of information. At least one of the authors of an environmental report must have an understanding of the business issues that affect the client's objectives. If necessary, the scope of an assessment or the wording of a report may be adjusted according to the business needs of the client. Regardless of the data gathering process, the real value of a consultant's service to the client is understanding the client's objectives when assimilating, analyzing and presenting the data gathered.

E-sources

American Society for Testing & Materials — www.astm.org

National Association of Real Estate Appraisers — www.iami.org/narea.html

National Association of Review Appraisers & Mortgage Underwriters — www.iami.org/nara/mu.html

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This article appeared in Environmental Protection magazine, Vol. 11, No. 4, p. 14, April 2000.

This article originally appeared in the 04/01/2000 issue of Environmental Protection.