By Erika Dahlem, Senior Project Manager with GRS Group, an NV5 Company
While navigating the acquisition process, it is important to recognize the value of environmental due diligence. It is common for prospective owners, lenders, developers, or other interested parties to require an environmental assessment to understand potential risks associated with the purchase of a property. Scopes of work can vary widely based on the type of property, size of property, loan amount, risk tolerance, and lender requirements; however, many environmental due diligence scopes of work are based around ASTM E1527-13 or -21*, which outline the Phase I Environmental Site Assessment (ESA) process.
When considering financing a multi-family residential property through Fannie Mae or Freddie Mac, Phase I ESA reports must comply with the most recent ASTM standard. Additionally, Fannie Mae and Freddie Mac require evaluation of several Business Environmental Risks (BERs), such as asbestos, lead-based paint, radon, and drinking water quality, among others. Prior to engaging environmental due diligence services, it is important to understand how BER evaluation and agency requirements can impact report turnaround time and pricing considerations.
Assessment of many BERs can be performed via desktop review of regulatory and historical records; however, several BERs must be evaluated by trained or certified personnel during site reconnaissance. For example, both Fannie Mae and Freddie Mac-compliant Phase I ESAs must contain discussion of asbestos, lead-based paint, mold, and radon.
When completing a Freddie Mac-compliant Phase I ESA, radon sampling is required for nearly every property. Note that in some states, radon testing must be completed by a certified radon tester. Limited asbestos sampling is also required if friable or damaged non-friable suspect materials are identified. Alternatively, asbestos sampling is not required for Fannie Mae-compliant Phase I ESAs, and radon sampling is recommended at the discretion of the environmental professional.
It is not uncommon for borrowers to decide to move forward with an agency lender but have some uncertainty about whether the deal will proceed with Fannie Mae or Freddie Mac. In those situations, consideration of BER assessment is of utmost importance. Freddie Mac Phase I ESA guidelines tend to be more stringent and require more testing than Fannie Mae guidelines. As such, it is advisable to obtain a Freddie Mac-compliant report since the Phase I ESA can be converted to a Fannie Mae-compliant report without further inspection. Alternatively, if a Fannie Mae-compliant Phase I ESA is later converted to Freddie Mac scope of work, an additional site visit and/or further sampling may be required. This can have a considerable impact on report cost and timing.
It is important to understand the scope of work required by each lender prior to engaging environmental due diligence services. GRS Group, an NV5 Company, has prepared thousands of Fannie Mae and Freddie Mac-compliant Phase I ESAs and can provide lenders and borrowers with details and nuances to consider when selecting an appropriate scope of work for their environmental due diligence needs.
* Note that ASTM E1527-13 was updated in November 2021. Details regarding the recent update are available at https://staging.nv5.com/blog/status-report-on-updates-of-astm-standard-practices/