Commercial real estate is a complex world, and finding success as a CRE professional can be a true juggling act. Those buying, lending for, or developing commercial real estate are expected to not only keep up with progress in their specific field of expertise, but also to keep a 10,000-foot view and stay abreast of all standards and regulations governing the physical due diligence process. As a Professional Geologist, I know firsthand that environmental assessment standards are constantly evolving with little regard for the learning curve of the uninitiated. In the last few years alone, we have seen numerous updates to Environmental Protection Agency (EPA) and ASTM standards that directly impact real estate professionals. With so many details to keep track of, it is easy for commercial real estate professionals to overlook the minutiae of a due diligence standard change. However, to ensure compliance and minimize professional liability, it is important to understand exactly what the revisions were and how they impact your due diligence requirements.
Let me outline the 4 key changes:
1) ASTM E2600-15 Standard Guide for Vapor Encroachment Screening
What you need to know: Not every property will warrant the same level of screening. The appropriate level of screening should be guided by the nature of the property subject to screening and the information already available or developed during the investigation.
It should not be concluded or assumed that an investigation was not adequate because it did not identify Vapor Encroachment Conditions (VEC) in connection with a property. The Vapor Encroachment Screening (VES) must be evaluated based on the reasonableness of judgments made at the time and under the circumstances in which they were made.
Subsequent VESs should not be considered valid bases to judge the appropriateness of any prior screening if based on hindsight, new information, use of developing technology or analytical techniques, or similar factors.
Here is how to avoid potential future vapor migration/intrusion investigation costs after a property is acquired:
2) ASTM E2018 Property Condition Assessment (PCA)
What you need to know: As opposed to the Environmental Site Assessment standard, this update is considered a “guide”, which means nothing is truly mandatory. The good news is most consultants will perform Property Condition Assessments in adherence with the E2018-15 standard, even though legally speaking, the language of the guide may be imprecise.
3) ASTM Standard for Probable Maximum Loss (PML) Changes
What you need to know: There are still two relevant standards for Probable Maximum Loss (PML) assessments. ASTM E2026 is needed to understand the range of approaches to PMLs (there are more than 5,000 possible combinations of various elements), but E2557 is adequate if you already know what you want. ASTM E2026 is a “guide”, so the warning about E2018 applies here too. There are lots of options, and it’s not possible to ask for a report compliant with E2026 without calling out specific criteria. It’s essentially a compendium of information about tiered approaches to various aspects of seismic risk.
ASTM E2557 is a “practice,” which means parts of it are mandatory, but users still need to define risk criteria used in the PML assessment, and some parts are written to be optional. No single approach to PMLs is defined, but there is reference to typical evaluation criteria for CMBS transactions. For legal purposes, it’s still important to define some specifics in the contract. E2557 references E2026, so it can be important to understand both standards.
The most significant change is the requirement that an engineer with seismic design and assessment experience performs a site visit. Additionally, certification language was added to PML reports to require statements concerning site stability and building stability. Finally, Appendix forms X4 and X5 are recommended by E2557 (some consultants are representing these as required, but that’s not how the changes are written. There are problems with Form X4 which should be clarified.
4) EPA: Stormwater Management – Issued in 2017
What you need to know: The EPA has issued the 2017 Construction General Permit (CGP), including provisions for which the National Association of Home Builders (NAHB) and its members have fought long and hard through testimony, letters, and rounds of meetings. The CGP took effect on February 16th, 2017 and will last for five years. While it’s applicable only in New Mexico, Idaho, Massachusetts, and New Hampshire, this permit provides other states with a model for developing their own stormwater management requirements. Developers and builders must seek CGPs for construction that disturbs more than one acre, or less than one acre when that site is within a larger common plan of development.
Commercial real estate transactions can be complicated enough. Staying ahead of due diligence requirements is a smart first step to effectively manage risk and liability.