The CRE market is hot, there has been some talk of looser underwriting and investors taking on riskier deals, but you don’t have to let down your standards to make a deal work. Resources are stretched thin, inventory is low and time is at a premium. Even when all of the parties in the transaction are pushing to get the closing over the finish line, there are just some things that can’t be accelerated. But what if you are dealing with a less than perfect site, one that has gotten a hit during a Phase II ESA or during a site characterization? Lenders may be leery to fund, and buyers may be less likely to want to obtain a site with potentially unknown clean-up costs attached. Does this mean you have to pump the brakes on your deal, or worse, pull out completely? The answer is not necessarily if you perform a Remedial Cost Estimate.
What is a Remedial Cost Estimate?
A Remedial Cost Estimate (RCE), also called an Opinion of Probable Cost, is performed by remedial experts and cost engineers, who will review pertinent prior reports and available data to determine the likelihood and extent of the work that will need to be done to achieve regulatory closure and then calculate an order-of-magnitude cost opinion based on their findings.
An RCE can be an important tool when assessing planning and budgeting, establishing reserves, during property acquisitions, and for financing. In addition to helping make budgetary decisions, an RCE helps to further quantify the environmental liability at a site. It answers the question of how much will this cost but also what will regulators make you do to remedy it. Something to keep in mind is that each state operates differently and not all cleanup and permitting requirements are straightforward.
Who needs a Remedial Cost Estimate?
Typically, an RCE will make the transaction progress more smoothly for all parties involved. Lenders will have a full picture of the deal and will be aware of the line-by-line cost items associated with funding on a potentially contaminated property. Equity purchasers will feel more risk-tolerant chasing “dirtier” deals by knowing the ”worst-case scenario” and identifying any unwanted exposure upfront. An RCE will help determine if, in the long run, the investment makes sense. If you are planning on developing the property, having an RCE will give you an accurate view of cost and scheduling before you break ground. Without one, you are leaving your project open to budget increases, schedule creeps, regulatory issues, and, in some cases, long-term monitoring/maintenance or the cost associated with additional scope, such as a human health risk assessment. A Remedial Cost Estimate could be the commonly missed step that saves your deal or gets it closed.
When should I do a Remedial Cost Estimate?
In most cases, an RCE is done following a subsurface investigation or site characterization that has confirmed the presence of contamination on the property. However, if the property has a historic use or is a high-risk site that lends itself to the possibility of contamination, it can be done immediately after the Phase I Environmental Assessment (PI ESA). By doing this, you may save time in the overall transaction. An RCE can be done without subsurface data when your consultant has an extensive database of actual remedial costs based on real-life project experience. A thorough and experienced PI ESA consultant will be able to provide complete and accurate data which is essential to a precise RCE. If your consultant lacks experience, it may prove to be more of a headache that will require subsurface work in order to back up the validity of your RCE.
How will a Remedial Cost Estimate Help Me Close My Deal?
Deals are taking longer, due in part to the low supply so now, more than ever, and it is in every party’s best interest to have a quick (and clean) deal. A remedial cost estimate will provide an in-depth look at the cost, scheduling, and overall viability of your transaction. By using this tool, you can determine your risk exposure before funding, acquiring, or developing a property. When contracting an environmental consultant, be sure to consider their experience with all manner of contaminants, media, and remedial technologies so that they can provide quality and cost-effective estimates for evaluating the environmental liability of a single site or an entire portfolio of properties.