In compliance with the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, most commercial real estate sales include a Phase I Environmental Site Assessment (ESA) to identify environmental concerns at the site. This act of environmental due diligence allows property stakeholders to determine if there are any liability concerns of which they should be aware prior to completing the transaction.
A Phase I ESA will ideally return a report reflecting a property without any contamination concerns. However, if contamination or potential risk is detected, the property is said to have a Recognized Environmental Condition (REC). RECs can be intimidating as they require further investigation and mitigation, which can place strain on project budgets and timelines. While the automatic response to a REC finding is often a Phase II ESA subsurface investigation, project teams should first consider alternative strategies.
After performing a Phase I ESA and finding a REC, the client should be contacted to discuss how they would like to pursue the issue. It is possible that, with further research and interviews, additional information will be uncovered indicating that the REC is not a significant risk, can be controlled, or has already been resolved. If this research does not provide a solution, other alternatives prior to Phase II ESAs can be explored by the client. Site-specific assessments, for example, allow for certain operations’ and industries’ sites to be investigated with a focus on common sources of contamination. This provides an in-depth environmental risk assessment without a Phase II ESA. Other commercial transactions may benefit from a remedial cost estimate.
A remedial cost estimate (RCE) allows clients to assess their mitigation needs and options with respect to their budget and can assist them in navigating potential environmental insurance policies for commercial investments and holdback funds. Holdback funds may be reserved by clients in an escrow to cover potential costs of remediation so the transaction may proceed despite risks. Other clients looking to continue the transaction may choose to do a parcel carve-out, in which the parcel holding the REC is separated from the sale property. If both the REC site and target property are contained within the same parcel, the site may be able to be turned into its own separate parcel and carved out.
When the real estate transaction is continuing for high-risk properties or those with known environmental concerns, environmental indemnity clauses can be invoked to indemnify future buyers or owners from any environmental liability associated with the REC. Clients may also choose to maintain liability for remediation while continuing the transaction. If the REC remains significant despite the suggested alternative routes a Phase II ESA may be necessary, but it can be streamlined for efficiency. This will ultimately prove financially optimal through the exhaustion of due diligence to ensure the environmental risk is managed and future issues mitigated.
To read the full blog by Jenny Redlin, REPA, visit GlobeSt.com