In the good state of the world, four out of five Phase 1 Environmental Site Assessments come back with no further recommendations. But what about in the bad state of the world?
In the bad state of the world the Phase 1 ESA recommends Phase 2 Environmental Testing and then the Phase 2 Environmental Report comes back hot. Often the deal dies, but what if you still want to the do the deal? Financial clients sometimes say that they can do the deal if they can just put a reliable number on the environmental contamination. The goal is a reliable Remedial Cost Estimate.
Two important questions must be asked before a reliable Remedial Cost Estimate can be prepared: 1) How big is the problem? 2) What will the government make us do about it?
Phase 3 Environmental Characterization: The Phase 2 ESA determines the presence or absence of contamination. The “Phase 3” or Environmental Site Characterization process determines how far the contamination goes in each direction: up, down, north, south, east, and west. The Environmental Site Characterization is often a more involved process, as big problems might require multiple iterations of testing.
Environmental Cleanup Levels: In some states cleanup levels are published and clear. In other states, cleanup levels are case-by-case. Sometimes regulators are able to work with the client to develop a cleanup level in a reasonable time frame, and in other states it takes longer. The bottom line is that the cleanup goals may or may not be known with certainty at the time of the Remedial Cost Estimate.
Remedial Cost Estimate: Once the size of the problem and approximate cleanup goal are known, a reliable remedial cost estimate can be prepared. This process is rather straight forward: the environmental engineer will estimate how much each step of the process costs. Of course the reliability of the Remedial Cost Estimate is highly dependent on the qualifications and experience of the engineer or geologist.
One common error I see in Remedial Cost Estimates is that the engineer will not include ALL of the cost categories that are experienced by the owner. If the engineer only estimates the cost of the remediation itself, then the engineer may be missing a third of the cost. Common costs that are forgotten include the expense of regulatory oversight, the cost of a human health risk assessment, and/or the cost of long term monitoring.
Is the remedial cost estimate right? Predicting the future is always a bit tough. Sometimes I provide my Remedial Cost Estimates as a set of scenarios: Most Likely Scenario and Reasonable Worst Case Scenario. This gives the user a reasonable range of possible costs.
Financing Contaminated Properties: The lender usually takes the Remedial Cost Estimate and focuses on the highest number. The lender will usually apply a safety factor to the estimate, often multiplying by 1.25 or 1.5 depending on the lender’s risk tolerance.
The lender will often hold the money back in escrow. The borrower is typically forced to pay interest on the money in the hold back and is motivated to get the project closed. Sometimes the borrower may also be asked to sign a covenant as part of the deal. The covenant could require the borrower to report the release or require closure in a certain number of days. Covenants are often highly negotiable.
Remedial Cost Estimates are among the favorite parts of my practice at Partner Egineering and Science, Inc. I love to do them and love to talk about them. Give me a call if I can help, at 310-615-4500.