— By Gene Belli —
What retail and restaurant facility owners need to know about environmental and condition assessments.
At some point or points during the life of a thriving retail or restaurant property, it will inevitably require an assessment of sorts in the form of a Phase I Environmental Site Assessment (ESA), a Property Condition Assessment (PCA), a Facility Condition Assessment (FCA) or a Compliance Audit/Safety Assessment.
Gene Belli, AEI Consultants
The importance of these evaluations can often be underestimated due to their relative infrequency. That said, owners and managers of these facilities should have at least a base-level understanding of the assessments that could be relevant to their properties and the benefits of completing the processes. The differences between these evaluations and when they are performed is discussed further below.
Based on our experience evaluating retail and restaurant properties and portfolios across the United States and internationally, we’ve highlighted below the benefits, strategies and other factors associated with environmental and property assessments that facility owners and managers should keep in mind:
Assessments are a Critical Component of Comprehensive Due Diligence
Various environmental and property assessments are naturally completed for different purposes at different times.
Which assessments are completed and when can depend on whether it’s part of due diligence for acquisition, refinancing with a lender, internal risk review or long term capital planning.
Typically, environmental site assessments are completed as part of acquisition due diligence when a person or entity is purchasing a property or portfolio and must evaluate the overall condition of the property or properties.
It is critical that this work be performed in accordance with ASTM Standard Practice E1527-13 and the Environmental Protection Agency Standards and Practices for All Appropriate Inquiries (40 CFR Part 312). Meeting these standards will afford the purchaser protections under the Landowner Liability Protections including the “innocent landowner defense” under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), also known as Superfund.
Environmental assessments are also performed by lending institutions for due diligence prior to providing a loan on a property.
The Phase I Environmental Site Assessment (ESA) is the most common environmental evaluation and involves a site visit and a thorough review of historical and regulatory documents.
A Phase I is designed to identify environmental issues resulting from the current and historic uses of the site and the surrounding properties. These conditions may affect the property value and pose legal and financial liability.
Alongside a Phase I, specialized evaluations may be required or recommended based on the age of the structure or the region in which the property is located. These evaluations could include asbestos and lead-based paint surveys, radon sampling, lead in water sampling and indoor air quality evaluations.
Restaurant & Retail Facilities Can Face Unique Challenges
When acquiring or evaluating a retail site or a restaurant, there are some common characteristics of these properties and their locations that can render them vulnerable to certain issues.
For example, fast food and casual restaurants benefit from prime ‘Main-and-Main’ locations and often seek to occupy these locations when possible. The challenge is, many of these locations are on the same sites that gas stations or dry cleaners previously existed.
These locations often had underground storage tanks, conducted auto repair activities and on-site dry cleaners utilized chlorinated solvents which were highly mobile and often impacted soil and groundwater at these locations.
These prior uses can cause contamination of the soil and groundwater below the ground surface, which must be evaluated and remediated in order to minimize any risk to the property owner, operator and occupants of the building. Even nearby properties can cause risks of contaminants in the vapor phase, migrating into a building and causing indoor air quality issues.
The good news is, the current uses of most retail and restaurant facilities are not likely to create many environmental problems over the long term, as long as proper procedures are followed.
For instance, in restaurant kitchens, cooking grease needs to be used and disposed of properly, but is generally not a large concern.
Further, retail centers with dry cleaners need to make sure the floors in the spaces are epoxy sealed and the machine and chemicals are stored in secondary containment systems. Retail centers with tire and battery centers should make sure wastes are properly stored and disposed of properly and their underground hydraulic lifts are properly maintained.
Timely Maintenance and Capital Planning Boost Facility Operations and Investment
In addition to ESAs during the acquisition process, investors often perform a Property Condition Assessment (PCA) to evaluate the condition of the overall condition of a property. A PCA is designed to assess the age and condition of building components and identify deferred maintenance items, life safety issues and costs to be incurred in order to maintain the building in the short and long term (typically 10 years). PCAs are typically performed as part of acquisition assessment and also for due diligence prior to a lender providing financing on a property.
Depending on the region, the PCA may also be supplemented with a Seismic Risk Assessment (SRA). This is typically performed for West Coast properties; however, other areas of the country have high risks of seismic activity.
In addition to PCAs, owners of portfolios of properties can perform Facility Condition Assessments (FCAs). An FCA not only evaluates the useful life of building components but also projects anticipated maintenance and capital expenses for 20 years into the future. This includes, but is not limited to, when to replace roofs and HVAC systems, or when to perform upgrades to a parking lot.
These types of capital planning practices are used by ownership to determine where to allocate funds in a budget across a retail center or portfolio of properties to optimize investments and maximize the use of available capital.
The FCA also provides a facility condition index (FCI), which is a ratio of required expenses vs. the value of the building. If the FCI is found to be too high, it might be time to dispose of a property, or tear down and rebuild.
Risk Management
In addition to the assessments described above, owners of retail and restaurant properties want to minimize liability and protect patrons from risk of injury.
Compliance Audit/Safety Assessment can be used to evaluate properties for potential concerns. A recent client required all regional malls in their portfolio to be evaluated for rusted and damaged light poles, signage and pedestrian bridges, which had the potential to fall and injure someone. This preventative assessment allowed the mall owner to prioritize repairs and allocate funds in order to address identified issues.
For this assessment our team utilized tablet computers to collect field data, obtain images of all the facility components and geocoded them with latitude and longitude coordinates so that they could easily be mapped and identified by repair teams.
Ultimately, we were able to deliver a report with the capital cost to fix damaged components and our recommendations regarding schedule and priority of the items to be repair.
Whether for acquisition due diligence, compliance, safety or budget purposes, assessments that evaluate the environmental history and current condition of properties — and sites they sit upon — can be critical to the upkeep and safety of retail and restaurant facilities.
Owners and facility managers should have a basic awareness of the history and potential risks facing their properties in order to make smart decisions regarding when to enlist specialist to perform ‘checkups’ and make critical maintenance and investment decisions.
— Gene Belli is an executive vice president at AEI Consultants, an international consulting firm of more than 25 years that provides comprehensive services to commercial lenders, property owners, managers, tenants and developers. These services include environmental, property and facility assessments; zoning and energy consulting; site investigation and remediation; industrial hygiene; and construction risk management. For more information, email info@aeiconsultants.com.