Environmental Due Diligence: Records Search with Risk Assessment (RSRA) vs. Transaction Screen Assessment vs. Phase I Environmental Site Assessment (ESA): Each Has Its Uses in Commercial Property Transactions

Environmental Due Diligence (EDD)

     This post is about environmental due diligence in transacting commercial property. I have actually done some of this in the residential sphere in the form of pre-sale realty inspections of household sewage treatment systems and private water well systems. We would do records searches and physical inspections of these systems. We would locate and assess the condition and compliance of these systems and sometimes it was required to collect a water sample to be analyzed for coliform bacteria and sometimes lead if it was an older house. Commercial real estate transactions, however, require more detailed due diligence.

     According to Millman National Land Services:

“Environmental due diligence is the process of assessing real estate for any potential risk of environmental contamination.”

     EDD is typically required by lenders and those who provide grants such as government agencies for financing, refinancing, and for property used as collateral.

 

 

Phase I, II, III, and IV Environmental Site Assessments (ESAs)

     Environmental due diligence is simply assessing a property for environmental risks and liabilities before finalizing a transaction. This involves” identifying any environmental issues that could impact the value, usability, or liability of a property.”

     Environmental Site Assessments consist of four general processes: historical research, site inspection, interviews and records reviews, and sampling & testing. ESAs are usually carried out by professional environmental consultants. Financial and lending institutions may require certain levels of environmental assessment. No one wants to buy a contaminated property and become liable for its cleanup.

     There are four phases to environmental due diligence in the form of the four phases of ESAs. A Phase I ESA involves site visits, examination of historical records, interviews with current and former property owners, and review of regulatory databases. The goal is to determine if there are areas of concern that should be investigated further. When there is a recognized environmental condition (REC), a Phase II ESA may be recommended. Some RECs include dry cleaners, auto repair facilities, gas stations, underground storage tanks, or a toxic dump site.

     A Phase II ESA involves a more detailed investigation and usually involves subsurface sampling and testing of soil, groundwater, and indoor air quality. Phase II ESAs determine if remediation will be necessary. Chemicals of concern in testing and analysis include petroleum hydrocarbons, pesticides, heavy metals, asbestos, solvents, and mold.

     Phase III ESAs involve remediation and cleanup. They may involve soil removal, groundwater treatment, and/or hazardous material disposal. Remediation and cleanup are subject to local, state, and federal regulations.

     Phase IV ESAs involve remediation monitoring and closure of the site. Once the site is closed it can be deemed free of environmental liabilities.

 

 

Phase I Environmental Site Assessment

     One estimate I saw is that Phase I ESAs typically cost between $1500 and $6000 depending on the size, location, and characterization of the potential transaction. Others say the average cost is about $2000 or $1000-$4000. Phase I ESA’s take 2-4 weeks or 10-15 days on average depending on who you ask.

     One company, Land Gate, sells monthly or by subscription an inexpensive app called LandApp which “provides any U.S. property's proximity to nearby Superfund sites, contaminated sites, underground tanks, and abandoned wells. The tool also provides thorough data about any contaminated site's specific contaminant, remediation status, chemical properties, and more to provide you with information about a property's contamination risk with the click of a button.”

     Mikayla Bishop at Land Gate notes under what conditions a Phase I ESA is typically done:

·        If the property contains, or is suspected to contain, hazardous materials as a result of past or present activities, including those on adjacent properties

·        When prospective property owners want assurance about a property's condition and potential contamination risk

·        To satisfy the requirements for the innocent landowner defense

·        When financing properties where banks or lenders would require a Phase 1 site assessment to get an accurate property value

     According to the American Society of Testing and Materials (ASTM) a Phase I ESA involves “conducting an inquiry designed to identify ‘recognized environmental conditions’ in connection with a ‘subject property.’” A Phase I ESA may or may not involve searches for recorded environmental cleanup liens, depending on the agreement between the client and the environmental professional. The ESA may utilize previous ESAs on the subject property but still requires updated records searches and site visits.

     Any property contamination that may be hazardous is covered under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). CERCLA compliance must be explored where applicable. Other federal, state, and local laws must be considered as well.

     Assessing full Business Environmental Risk (BER) will require an even more in-depth process than a Phase I ESA.

 

All Appropriate Inquiries

     The 2002 Brownfields Amendments to CERCLA required EPA to make regulations establishing standards and practices for conducting All Appropriate Inquiries. All appropriate inquiries (AAI) is the process of evaluating a property’s environmental conditions, which may be relevant to assessing potential liability for any contamination. The AAI rule requires the following:

• Interviews with past and present owners, operators and occupants.

•Review of historical sources of information.

•Review of federal, state, tribal and local government records.

•Visual inspection of the facility and adjoining property.

•Review of commonly known or reasonably ascertainable information.

•Assessment of the degree of obviousness of the presence or likely presence of contamination at the property and the ability to detect the contamination.

The EPA also gives general requirements for who may qualify as an environmental professional (EP) who can do AAI. General liability insurance is required for those who do Phase I ESAs and some TSAs, but not for those who do only RSRAs or desktop environmental database reports.

     At increasingly less depth there are three levels of screening commercial properties for risk short of a Phase I ESA. These are the Transactional Screen Assessment (TSA), the Records Search with Risk Analysis (RSRA), and Environmental Database Reports (EDRs).  

 

 

Transactional Screen Assessment (TSA)

     A Transactional Screen assessment is simply an ESA that is less in-depth and a records search with risk assessment is an even more surficial screen for properties considered low risk. According to A3E Environmental TSA is essentially an RSRA with a site visit. TSAs can be done faster than Phase I ESAs but may require longer times due to travel requirements for site visits. Banks often request TSAs by name for certain projects, but they may not be required, and they may be applicable to other projects in place of a Phase 1 ESA. A typical price for a TSA is $950. Both Phase I ESAs and TSAs are prescribed by the ASTM and are sometimes said to be ASTM products. According to ASTM and TSA:

“…is intended for use on a voluntary basis by parties who wish to assess the environmental condition of a subject property where a Phase I Environmental Site Assessment is, initially, deemed to be unnecessary by the user and the parties do not seek CERCLA LLPs {limited liability protections}. This practice is intended primarily as a commercially prudent or reasonable approach to conducting an inquiry designed to identify potential environmental concerns in connection with a subject property.”

     The TSA may be performed by an environmental professional but that is not a requirement. Lenders, brokers, appraisers, corporations, lawyers, government agencies (civilian and military), or any other party may do a TSA. Some entities, like governments, as well as some lenders may require a professional opinion as part of the process or in addition to the TSA. According to ASTM a previous TSA may be used as still valid if it was recent, usually within 12 months, but only if there is no reason to believe there have been any changes in environmental liabilities within that time period. Both Phase I ESAs and TSAs are considered good for 180 days, otherwise. A TSA does not satisfy the requirement to conduct an AAI.

     Banks and other lenders who make Small Business Administration (SBA) loans often request TSAs. Both TSAs and RSRAs are screens and do not provide any liability protection. Both may lead to the need for a Phase I ESA.

 

 

Records Search with Risk Assessment (RSRA)

     According to Curren Environmental’s David Sulock:

“Many banks and the SBA will accept a Records Search with Risk Assessment (RSRA) in lieu of a Phase I Environmental Site Assessment (ESAs) for low-risk properties. An RSRA product is an expedited and inexpensive due diligence product that allows the lender to evaluate the environmental risk quickly.   The RSRA can determine if a full Phase I is required.”

An RSRA provides a quick and low-cost snapshot of what are considered to be low-risk properties. An RSRA has also been referred to as a preliminary Phase I Assessment. According to Environmental Assessment Services (EAS), Inc:

“The United States Small Business Administration Standard Operating Procedure SBA SOP 50-10 5(C) specifies RSRA for low-risk properties, especially on loans of $250,000 or less. This form is also an excellent product for determining risk potential very early in the purchase process and especially useful if you are evaluating more than one property and especially in the case of perceived “high risk” type property.”

Thus, depending on the risk category the SBA will accept either a TSA or an RSRA. EAS, Inc. can produce an RSRA within 24 hours. The North American Industry Classification System (NAICS) has a list of environmentally sensitive industries shown below which require an ESA vs. an RSRA.

Source: North American Industry Classification System (NAICS)

     According to Janet Annan of Partner Engineering & Science, an RSRA:

“…must also include a search of historical use records dating back to 1940 or first developed use pertaining to the subject property. Appropriate records can include aerial photography, city directories, reverse directories and/or fire insurance maps. Topographic maps are also appropriate; however, should not be used as a sole-source for determination of risk.  A RSRA protocol will generally conform to the Phase I ESA ASTM Standard (E1527-13).”

An RSRA does not adhere to any ASTM standards. Annan also notes that consultants will often credit the cost of limited environmental assessments such as a TSA or an RSRA towards a Phase I ESA if the report comes back high risk or with potential environmental concerns (PECs). If not, the client could end up paying twice. Some firms can only provide desktop reports and are unable to assist when a higher level of due diligence is needed. She also notes an SBE SOP update in 2019 that allows some investigations to proceed from a TSA directly to a Phase II ESA:

“As a part of the SOP 50 10 (K) update in 2019, the SBA clarified that when an environmental consultant recommends proceeding directly from a TSA to a Phase II ESA, and this is agreed upon by the Lender, the Lender must seek in advance a case-by-case policy exception from the SBA Environmental Committee.”

     With an RSRA no site visit, interviews, or other information aside from basic historical and database information is gathered. Along with a database review, other sources may be consulted, including city directories, historical aerial photographs, and fire insurance maps. An RSRA flow chart for SBA loans is shown below. 

Source: A3E Environmental

     For SBA loans an Environmental Questionnaire (EQ) is required, which meets the SBA SOP, and must also accompany the SBA RSRA. According to Karen Nelson at Environmental Risk Innovations:

“…a non-SBA RSRA/Desktop Review may not necessarily include an Environmental Questionnaire and may include less historical data.”

She also notes that banks have been moving away from TSAs in fav or of RSRAs, noting that site visits and questionnaires are often unnecessary.

     Sierra Consultants offer a low-cost RSRA they call EZ-Screen:

“RSRA EZ-Screen is the fastest and most affordable way to evaluate real estate for environmental risk. $295 and guaranteed next day! Required by SBA – but GREAT for non-SBA real estate deals too!”

They do a regular RSRA for about $500 with a 2 to 3 day turnaround time. Sierra Consulting, as well as other companies, does RSRAs and EDRs without charge if they trigger a Phase I ESA. This is sensible and cost-saving for lenders. They note that in some cases a Phase I ESA can be bypassed:

“If a legitimate concern is discovered, sometimes that concern can be investigated on its own merit (e.g.: Phase II sampling), potentially saving weeks, not to mention thousands in Phase I fees.”

     Sierra Consultants also explains the history and development of the RSRA process by the SBA:

“Since about 2007, this quick and inexpensive report has been a viable alternative to the Phase I Environmental Site Assessment (ESA) in many cases.  The report is part of the SBA 504 and SBA 7(a) Loan Programs for commercial real estate (CRE) collateral, but is not confined to only SBA deals.”

They also give the following important general advice and commentary about commercial real estate environmental due diligence requirements:

All Commercial Real Estate (CRE) collateral requires some form of environmental due diligence.

If the collateral’s current or past use is listed on the identified “environmentally sensitive industries”, then a Phase I Environmental Site Assessment (ESA) must be performed. The ESA must be approved by SBA prior to the loan being disbursed.  PLP’s and SBA Express Lenders may be able to approve or deny reports independently.

For non-NAICS listed collateral, loan size determines the next step:

If the loan <$150,000, then an Environmental Questionnaire must be completed by the borrower.

If the loan is >$150,000, then a Records Search with Risk Assessment (RSRA) must be performed in addition to the Environmental Questionnaire.

(Pro Tip: provide the questionnaire or other previous environmental reports to your RSRA provider at the time of ordering)

If the report indicates “Low Risk”, then send the report for review by SBA underwriting. Again, PLP and Express lenders may be able to do this in-house).

For “Elevated Risk” properties, the recommendations of the environmental professional must be followed.  Usually this involves a Phase I ESA.

(Pro Tip: Consultants sometimes recommend additional work which represents a real or perceived conflict of interest.  Learn how how our “Clean or Free” guarantee completely eliminates any such conflicts.)

Regarding the last statement about consultants triggering ESAs as an additional charge to generate work for themselves, I am sure it happens. How much it happens is not known. According to Dave VerSluis, Environmental Risk Analyst for CRE Deals, who is also associated with Sierra Consultants, it does happen a lot. The issue was brought up in the podcast interview of Donald Trump by Joe Rogan, where they both agreed that "Environmental Consultants Profit From Dragging Out The Process!” However, I think Trump was referring to something else as he referred to the discovery of sensitive plants on a potential construction site triggering further environmental evaluation.

 

    

Environmental Database Reports (EDRs), or Desktop Reviews, for Records Searches and the Role of Vendors

     An environmental database report (EDR) is the quickest and cheapest environmental screen available, containing only parts of an RSRA. According to A3E Environmental:

“Environmental Database Reports (EDR Reports) are low cost, high level data regarding the environmental risks affecting a target property. They are sometimes called Desktop Assessments, Desktop Due Diligence or Desktop Environmental Reports. The desktop refers to the fact that an environmental consultant does not visit the subject property like they do in a Phase I ESA. We call them Environmental Screens (ES).”

EDR reports are of two kinds, raw and interpreted by an EP. They are typically given as a radius map centered at the subject property. Database “hits” indicate potential liabilities within that radius. Urban areas are populated with a greater density of hits. There are several vendors that provide EDRs. The two biggest are EDR and ERIS. A3E Environmental uses ERIS and they believe it contains better data and is more comprehensive. AE3 charges $200 for a desktop risk assessment with interpretation and $99 without interpretation.

 

 

Joe Rogan: "Environmental Consultants Profit From Dragging Out The Process!" Dave VerSluis, Environmental Risk Analyst for CRE Deals. Posted on LinkedIn. (26) Joe Rogan: "Environmental Consultants Profit From Dragging Out The Process!" | LinkedIn

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RSRA: “Record Search with Risk Assessment” – Lender Guidance from SBA. Sierra Consultants Blog. May 9, 2020. RSRA: "Record Search with Risk Assessment" - Lender Guidance from SBA | Sierra Environmental Consultants, Records Search with Risk Assessment - RSRA

Free Record Search with Risk Assessment – Nationwide. Sierra Consultants Blog. July 29, 2018. Free Record Search with Risk Assessment - Nationwide | Sierra Environmental Consultants, Records Search with Risk Assessment - RSRA

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RSRAs and TSAs – The Similarities and Differences. Karen Nelson. August 25, 2017. Guides, SBA. Environmental Risk Innovations. RSRAs and TSAs – The Similarities and Differences - Environmental Risk Innovations

$850 Record Search with Risk Assessment (RSRA). A3E Environmental Consultants. Record Search Risk Assessment (RSRA) SBA SOP 50 10 5(K)

Records Search with Risk Assessment vs. Transaction Screen Assessment for SBA Loans. Janet Anna. Partner Engineering & Science, Inc. September 11, 2020. Records Search with Risk Assessment vs. Transaction Screen Assessment for SBA Loans | Partner Engineering and Science, Inc.

Records Search and Risk Assessment. Environmental Assessment Services, Inc. RSRA | Records Search and Risk Assessment

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Environmental Due Diligence in Commercial Real Estate. Makayla Bishop. Land Gate. August 12, 2024. Environmental Due Diligence in Commercial Real Estate

What Is Environmental Due Diligence? A Complete Guide. Millman Nation Land Services. What Is Environmental Due Diligence? A Complete Guide - Millman Land

What is a Transaction Screen Assessment (TSA)? A3E Environmental Consultants. What is a Transaction Screen Assessment (TSA)?

What is a Phase 1 Report? Mikayla Bishop. Land Gate. May 8, 2024. What is a Phase 1 Report?

Standard Practice for Limited Environmental Due Diligence: Transaction Screen Process. ASTM E1528-22. American Society for Testing and Materials. July 29, 2022. E1528 Standard Practice for Limited Environmental Due Diligence: Transaction Screen Process

Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process. ASTM E1527-21. American Society for Testing and Materials. E1527 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process

All Appropriate Inquiries Final Rule. U.S. EPA. https://www.epa.gov/system/files/documents/2023-03/English%20AAI%20factsheet.pdf

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