How a Remediation Cost Estimate Could Help Close the Deal

What is Remediation Cost Estimate?

Remediation Cost Estimate (RCE) refers to a review of probable remediation costs necessary to achieve regulatory compliance for contaminated real estate.

When Phase I Environmental Site Assessment (ESA) identifies the property as a site with potential contamination, remediation experts perform RCEs, giving the opinion of probable costs the purchaser or lender must pay to get regulatory approval.

Determining the remediation costs of cleaning up the site, remedial experts rely on pertinent prior reports and other available data. Using that information, environmental experts project the necessary work the purchaser must undertake to achieve regulatory compliance, including the estimated costs to complete that task.

Why is RCE Important for Commercial Real Estate Market?

Closing deals in commercial real estate transactions are never guaranteed. There are a lot of factors you need to consider making a deal work. Both lenders and buyers have reasons to be concerned about investing in a site with potential contamination. Funding and obtaining real estate with unknown remedial costs is challenging for everyone involved in commercial real estate transactions. Lenders and equity purchasers need to see a clear projection of the deal before deciding to invest. Getting a clear picture means investors need to rely on Remediation Cost Estimates. RCEs allow them to familiarize themselves with potential upfront costs connected with remediation work. Knowing the best-case and worst-case scenarios are vital for purchasers and lenders when obtaining a contaminated site. Understanding the potential costs of cleaning up and getting regulatory approval helps investors decide if the investment is worth the effort.

When is the Best Time to Perform Remediation Cost Estimates?

• After Phase I ESA

For some experts, the best time to perform RCE is right after the Phase I Environmental Site Assessment. During a Phase I ESA, environmental experts use historical data (aerial photographs, topographical maps, planning records, building permits) and perform site visits. They conduct interviews, geological and hydrogeological analyses, and regulatory research. Based on an in-depth site assessment, experts may identify the real estate as a high-risk site with potentially hazardous substances. Given the importance of Phase I ESA, RCE experts rely on the assistance of environmental site assessment consultants to perform accurate remedial cost estimates.

• After Phase II ESA

However, others suggest performing an RCE after a Phase II ESA when more detailed data are available. A Phase II identifies petroleum products, pollutants, contaminants, or other hazardous substances in the subsurface soils. After a Phase I ESA is completed, the experts conduct Phase II Environmental Site Assessment consistent with the applicable sections of the Standard Guide for Phase II Environmental Site Assessments: Planning and Implementation (ASTM E1903-19). The process consists of visual site inspections, sampling, and the review of the available record. Environmental experts then prepare written reports with conclusions and recommendations. The report contains a site description that includes the following information: land use, description of surface, topography and hydrology, vegetative cover, groundwater table depths and direction of groundwater flow, drainage pattern, location of buildings (demolished or newly constructed), the topography of surrounding land, etc. Hence, the idea behind conducting remedial cost estimates following a Phase II ESA is that more data available and increases the chances of a more accurate RCE.

How to Calculate an Accurate Remediation Cost Estimate?

Calculating accurate and precise remediation cost estimates require considering all available data from Phase I and II environmental site assessments. In addition to relying on the ESA written reports, environmental experts must analyze the following:

• Regulatory requirements. Depending on the state, achieving regulatory compliance can take more or less time, which is a decisive factor in calculating the overall remedial costs. Some states have simple clean-up requirements, while others impose burdensome regulations regarding the clean-up process.

• The degree of site delineation. Determining precise contamination boundaries is vital when defining remediation area and volume. A larger remediation area results in more clean-up volume, which leads to additional costs. The degree of site delineation (precise borders) is proportionate to the clean-up costs.

• Physical properties of the site. Depending on the physical description of the site (soil type, groundwater table depth, groundwater flow direction, drainage pattern, location of buildings, parking lots, paths, paved areas, buried tanks or drums, etc.), the remedial costs can vary.

• Remediation time. Clean-up time is a significant contributing factor in determining the overall costs. When calculating the necessary funds, the consultants must have precise input regarding the desired time. Completing remediation in a few months is more expensive than doing it in several years. The time available for remediation is in close relation to costs.

• Health risk assessment. A decisive factor in calculating accurate remedial costs is health risk assessment. Many RCE reports omit to calculate the costs of averting or minimizing the health risks involved in any clean-up process. Excluding these expenses significantly reduce the remedial cost, which results in inaccurate estimates. That is why a clean-up cost consultant must not oversee any factor contributing to the overall costs. If some contributing costs are left out, the report must explicitly show which expenses were not part of the calculation. That way, lenders and purchasers can see the upfront remedial costs when investing.

• Maintenance and monitoring costs. Long-term maintenance and monitoring can represent a significant financial burden for property owners. Therefore, each RCE report must include these costs to accurately portray potential expenditures for purchasers and lenders considering an investment. As mentioned, the report must explicitly state when these costs are not in the calculation.

The Degrees of Accuracy

Calculating remediation costs can take different forms and degrees of accuracy. Depending on the available time and the client’s preferences, calculations go from guestimates to so-called SWAG (scientific wild-ass guess) to accurate expert RCE reports containing all necessary information.

To avoid unexpected costs, ensure your RCE experts use standard cost-estimate guidelines. The most common are the ASTM Standard Guide for Estimating Monetary Costs and Liabilities for Environmental Matters (ASTM E2137-17) and USEPA’s Guide to Developing and Documenting Cost Estimates During the Feasibility Study.

Unique Approach to Remediation Cost Estimates

At Hanis Consulting, we care about your investments. Commercial real estate transactions always come with uncertainty, but our mission is to minimize your exposure to risk by providing you with accurate Remediation Cost Estimates.

Relying on sophisticated scientific knowledge and technological expertise while following the most rigorous industry-approved cost-estimate guidelines, we produce reports ensuring your commercial real estate investment makes sense.

No two sites are identical, so our experts will provide you with a unique, custom-tailored approach to calculating remediation cost estimates.

We are available for clients in Chicago and Milwaukee areas. Reach out today to schedule your appointment.