In the world of real estate there are so many factors that can alter a potential deal. One of the higher risk factors for both the buyer and seller is the unknown cost to remediate a property. If your Phase I turns into a Phase II, both parties in the transaction may shudder at the possibility of having to further investigate and remediate the site. But the good news is that being prepared may save you not only a headache but can prevent you from sinking your deal or breaking your budget. A comprehensive Remedial Cost Estimate (RCE), or an Opinion of Cost, can help to quantify and mitigate the environmental liability of a site deemed to be impacted during the Phase II. An RCE is the key to calculating the greatest amount of risk mitigation and costs associated with these unknown factors.
What is a Remedial Cost Estimate?
The RCE would typically be completed after a subsurface investigation and/or site characterization confirmed the presence of and extent of contamination at a site. The more data is available, the more comprehensive and accurate the RCE will be.
Similar to the process of conducting due diligence for any property (for example, a Phase I Environmental Site Assessment (ESA) or Property Condition Assessment (PCA)), the RCE not only considers the monetary cost of remediation, but other factors that could effect your bottom line, as well as your project schedule. An environmental remediation specialist will calculate the cost of the proposed scope of work that would be necessary to bring the property up to environmental compliance standards. They will review any prior reports and data to determine the magnitude and options available to obtain regulatory compliance. Other factors that these professionals will consider include regulatory requirements and operations throughout and after the remediation. The RCE should answer two questions: 1) What is the cost to clean up the site? and 2) What is required to receive a No Further Action (NFA) status from the regulators?
Why do I need an itemized Remedial Cost Estimate?
An RCE can be a determining factor in successfully negotiating the cost and conditions in the sale of an environmentally impacted property. By taking the time to have an itemized cost estimate, you are less likely to encounter a surprising cost or schedule delay in the middle of your transaction. A crucial component of a complete RCE is consideration of regulatory requirements that could impose additional time and cost, especially in states where the cleanup requirements are not as straightforward as in other states or where licensed environmental specialists are required. Another common oversight is that the cost engineer will not include all costs that can go along with remediation, such as a human health risk assessment and/or the cost of long term operations and post-remediation maintenance or monitoring. A remediation professional should be fully educated on state laws and regulations, which could save you or your client from incurring the costly fines associated when the work is not done in compliance.
If you are going into the transaction knowing that the property is contaminated, you may save money at the onset of the project by including the costs of the remediation into your initial design or development. A RCE will give both the buyer and seller a better idea of the overall land value and possible development options prior to the sale.
In some states, there are also tax breaks to be made for cleaning and redeveloping a Brownfield or environmentally challenged properties. Some states offer financial assistance through the regulatory agency or through third parties to assist in efforts to achieve regulatory compliance.
While there is always the possibility of environmental issues coming up during a sale or development project, risk assessment and management is your best bet to be prepared to bring your property to compliance, negotiating a fair selling price, or ensuring that your transaction is a success. In the long term, after your deal finalized, a complete, itemized RCE could be essential for planning, budgeting, establishing reserves, property acquisitions, and financing. Most critical to obtaining a quality RCE is engaging a consultant that is highly experienced in conducting environmental remediation and is knowledgeable of the individual state regulatory requirements. A good consultant can guide you to efficient and effective remediation methods to achieve compliance and closure.