Real Estate Transactions and the Recognized Environmental Conditions

Nov 25, 2020

Environmental Enlightenment #317

Nowadays, most transactions in commercial and industrial properties employ the Phase I Environmental Site Assessments to ascertain potentail risks to public health and the environment from non-optimal conditions of contaminated soil, contaminated groundwater, contaminated soil-vapor, or contaminated indoor air.

Such risks can originate on the property of interest, or they can encroach from peripheral neighbors, in exceptional cases even a mile away.

Lenders are averse to risks, and environmental situations can reduce collaterals in quick order.

But risk has no meaning if not quantified: how bad is bad? how good is good?

The yardstick for environmental risks in commrcial real estate transactions has become the Phase I Environmental Site Assessment process when done in acordance with rules of the ASTM (American Society for Testing and Materials) Standard Practice E-1527.

The Practice requires that we earch for Recognized Environmental Conditions (RECs).

It prescribes the investigatory routines to unearth RECs, and when any is found, most instituional lenders (and many a byuer) then balk until the Condition is removed.

ASTM defines the REC in a way that might be confusing to the uninitiated. It is “the presence or likely presence of any hazardous substances or petroleum products in, on, or at a property: (1) due to any release to the environment; (2) under conditions indicative of a release to the environment; or (3) under conditions that pose a material threat of a future release to the environment.

An easier way to understand the REC might be through the definition of what it is not: “De minimis conditions are not recognized environmental conditions.”

A de minimis condition is “a condition that generally does not present a threat to human health or the environment and that generally would not be the subject of an enforcement action if brought to the attention of appropriate governmental agencies.”

Regula stains of engine fluids on the floor of a car mechanic shop would normally be looked upon as “de minimis. Same for hydraulic hoists.

Reverse the “de minimis” condition and you find that an REC would be that which represents a threat to human health or the environment and that generally would be the subject of an enforcement action if brought to the attention of appropriate governmental agencies; and such situations would arise from actual or potential releases of petroleum products or hazardous substances to the environment.

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