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Addressing Environmental Risk for DSTs and Other Real Estate Offerings

by Brandon Raatikka

Assessing potential environmental issues is critical piece of due diligence for any prospective investor in real estate, given the potential liability exposure. Yet, environmental issues can often present the most complex and misunderstood aspects of a real estate transaction.

To help answer common questions about environmental assessments and the issues they identify and can mitigate, we talked with Stephanie Trueb of EBI Consulting. EBI Consulting provides environmental risk and compliance management, due diligence, energy use reduction and management, and engineering services to organizations. Sponsors or lenders in many of the real estate offerings FactRight reviews, especially DSTs, engage EBI Consulting for environmental and property condition assessments on the deal’s underlying real estate.

Ms. Trueb is an ESA Technical Director at EBI Consulting with 20 years’ experience specializing in assessments of commercial real estate, including conducting subsurface investigations, conducting file reviews and extensive environmental research, and performing asbestos and lead paint assessments and sampling. She currently manages ESA reviewers and environmental training programs. Real Estate Forum recently named Ms. Trueb one of its 2018 Women of Influence.

FactRight: What is the extent of potential environmental liability for property owners and investors in program that own real estate?

Stephanie Trueb of EBI Consulting: Depending on the level of due diligence done prior to acquiring a property and its historical and current use, the extent of potential environmental liability could be significant. If a potential owner does not complete due diligence as required by the All Appropriate Inquiry rule under federal environmental law and in accordance with ASTM guidelines, they could be potentially liable for contamination cleanup, regardless of when that contamination occurred.

What must an acquiring party do to minimize liability under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)?

A potential property owner should, at minimum, complete appropriate due diligence as outlined in the All Appropriate Inquiry rule, which includes obtaining a Phase I Environmental Site Assessment completed in accordance with existing ASTM standards within 180 days of acquisition. However, depending on a prospective owner’s risk tolerance and concerns about a property, more in-depth investigation and reporting may be recommended.

What if the sponsor or lender obtains the Phase I, but the investment program (real estate fund, REIT, DST, etc.) is not allowed to rely on it?

As long as the reliance language in the Phase I also includes the equity holder/investor entity name, then they can rely on the report.

Lack of reliance would mean that the investor would not be able to obtain CERCLA liability protections. Only the user of the report (i.e. the entity named in the reliance portion of the report, the entity completing the User Questionnaire, and the entity for which the report was prepared) can pursue the CERCLA liability protections. EBI often provides reliance to both equity holder/investors and lenders through either reliance within the report or a separate reliance letter.

Are there different “scopes” for Phase Is? What comprises the best practices?

ASTM E 1527-13 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process is the standard scope of work used in the commercial real estate industry. Lending institutions require their Phase I reports to meet this standard at a minimum. Some lenders develop an expanded scope of work, not only meeting the ASTM standard, but also reviewing additional considerations such as asbestos, lead-based paint, radon, and mold.

The ASTM standard has been in place for more than 25 years and is regularly reviewed and revised; a new standard is published every five to eight years. Any consultant completing Phase I reports must be an expert in this standard.

What are the most common and effective ways for real estate buyers to mitigate RECs identified by a Phase I? 

To most effectively mitigate RECs, sponsors should investigate any issues and complete any remediation according to all relevant regulatory requirements. Ultimately, the goal should be to achieve regulatory closure or some type of no further action status. This process can range from a few weeks to months or even years, depending on the extent of the issue. As most real estate transactions have a fairly short due diligence window, buyers and lenders often must make decisions that cannot wait months to years.

There are various other ways clients may choose to mitigate a REC in place of conducting additional investigation for real estate transaction purposes. These may include obtaining an environmental indemnity from the responsible party (if known), obtaining an environmental insurance policy, and obtaining an Opinion of Probable Cost from the consultant outlining their expert opinion on the cost to obtain closure of an issue, based on their previous experience.

We often see environmental consultants recommend adoption of an asbestos O&M plan. What does this consist of?

An Asbestos O&M Plan is a document developed for owners, employees, and occupants of a building for their use in managing suspect, assumed, or known asbestos-containing materials. It is designed to minimize the risk of human exposure to asbestos fibers and asbestos fiber release during general work activities, scheduled maintenance, or renovation of a building. Some elements contained in an Asbestos O&M Plan include:

  • A list of the suspect, assumed, or known asbestos-containing materials noted within the building through prior surveys or environmental assessments
  • Occupant and employee notifications
  • Provisions for labeling asbestos-containing materials
  • Work permit systems, work practices, and procedures to prevent releases
  • Employee protection and medical surveillance programs
  • Periodic surveillance of identified materials and a record-keeping system.

A properly implemented Asbestos O&M Plan must be maintained onsite and updated continuously as new materials are identified or abated.

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Filed Under: Due Diligence, Real Estate, DSTs