Recognized Environmental Condition: A Key Concept in Commercial Real Estate - Why Business Owners, Investors, Lenders, and Attorneys Should Care

If you are a business owner, commercial/industrial real estate investor, lender, or an attorney, the term "Recognized Environmental Condition" (REC) might just be a phrase that you've heard or will likely encounter. Whether you are already familiar with the term or hearing it for the first time, this post will serve to deepen your understanding of what RECs are, their importance in the commercial real estate sector, and the potential implications of not addressing them.

So, what is a Recognized Environmental Condition??

The American Society for Testing and Materials (ASTM) defines RECs as:

“(1) the presence of hazardous substances or petroleum products in, on, or at the subject property due to a release to the environment; (2) the likely presence of hazardous substances or petroleum products in, on or at the subject property due to a release or likely release to the environment; or (3) the presence of hazardous substances or petroleum products in, on or at the subject property under conditions that pose a material threat of a future release to the environment.”

This presence is typically due to a release to the environment, past release, or a material threat of a future release. Simply put, RECs are red flags indicating possible environmental contamination at a property.

Why is this important to your business, investment, or legal counsel??

RECs have potential financial, legal, and health risks associated with them. If a property is found to have a REC, the implications can range from the need for costly remediation efforts to potential legal liabilities. It can also influence the value of a property and its potential for redevelopment or sale.

Let's delve into a real-world example. Imagine purchasing a commercial property with an undisclosed REC, such as a former gas station. Unbeknownst to you, residual petroleum contaminants could have leaked into the soil, leading to a costly clean-up process or potential health risks for future occupants. This is a risk that could significantly affect the profitability of your investment or the reputation of your business.

To protect your interests, it is therefore vital to conduct thorough environmental due diligence when contemplating a commercial real estate transaction. This typically involves a Phase I Environmental Site Assessment (ESA), which identifies potential or existing environmental contamination liabilities, including RECs.

The ESA is conducted by environmental professionals who review records, make site visits, and interview owners, occupants, neighbors, and local government officials. Should the Phase I ESA indicate the presence of a REC, a Phase II ESA might be recommended, which includes sampling and laboratory analysis to confirm the presence and extent of contamination.

It's also worth mentioning that the US Small Business Administration (SBA) and most lending institutions require Phase I ESAs before providing financing for properties. This further emphasizes the importance of being aware of RECs, as it can directly impact your access to financial resources.

Attorneys also play a vital role in this process. Environmental law can be complex and varies from region to region. Having a well-versed attorney can ensure that your transaction is compliant with all environmental regulations and can assist in navigating potential issues associated with RECs.

In conclusion, whether you're a business owner looking to expand, a commercial/industrial real estate investor considering a new acquisition, a lender appraising collateral, or an attorney representing a client, understanding Recognized Environmental Conditions is essential. By conducting thorough due diligence, addressing RECs appropriately, and seeking professional advice, you can protect your interests, mitigate risk, and contribute towards a healthier and safer environment.

Please feel free to share this post with others who could benefit from this knowledge, and don't hesitate to reach out if you have any questions or need guidance on RECs or other environmental issues.?

Here's to doing business with environmental awareness.