Imagine buying a property only to discover that hidden underground tanks are leaking fuel into the soil, or that decades ago a dry cleaner left behind chemicals that still linger beneath the surface. Suddenly, your new investment comes with a multi-million-dollar cleanup bill.
That’s the risk posed by a little-known acronym: REC, short for Recognized Environmental Condition. And if you’re buying, selling, financing or potentially leasing commercial real estate, it’s something you need to understand.
What is a REC?
In the commercial real estate world, a REC means there is the presence or likely presence of hazardous substances or petroleum products on a property. These conditions may come from:
- A past or current release of contaminants into the soil, water, or air.
- Evidence suggesting a release might have happened, like stained soil or corroded barrels.
- Circumstances that pose a material threat of a future release.
Think of a REC as a red flag during due diligence. Just like a cracked foundation might derail a home purchase, a REC can bring a commercial deal to a grinding halt.
Why lenders and buyers care
A REC isn’t just an environmental issue, it’s a financial one.
- Financing: Banks typically require a clean environmental report before approving a loan. If a REC is flagged, the deal may be delayed, restructured, or even killed.
- Liability: Under federal and state laws, the new property owner could be held responsible for cleanup, even if they didn’t cause the problem.
- Value: Properties with RECs often appraise lower and can sit on the market longer.
How it works
When an industrial or commercial property changes hands, buyers usually commission a Phase I Environmental Site Assessment (ESA). This involves reviewing past records, inspecting the property, and interviewing current or former operators.
If the Phase I flags a REC, the next step is a Phase II ESA, which involves testing soil, groundwater, or air to confirm whether contamination exists.
Depending on results, options include:
- Remediation (removing or treating the contamination).
- Seeking regulatory closure if issues have already been addressed.
- Purchasing environmental insurance to cover potential risks.
- Negotiating price adjustments to reflect the added risk.
Historical and controlled RECs
Not all RECs are created equal.
- HREC (Historical REC): A past issue that’s been resolved to regulators’ satisfaction and no longer poses a risk.
- CREC (Controlled REC): A contamination issue that remains, but with restrictions in place (for example, limiting property use to industrial operations only).
While these don’t always kill deals, they do shape how a property can be used and what obligations an owner inherits.
How buyers and sellers react
For buyers, a REC means choices: walk away, renegotiate price, or push the seller to pay for further testing or cleanup. For sellers, a REC can mean offering concessions, securing insurance, or even cleaning up the property in advance to avoid surprises in escrow.
The bottom line
A REC doesn’t always spell disaster for a transaction. But it always changes the dynamics. Buyers, sellers, and brokers who understand how RECs work can work through the challenges, avoid liability and keep deals alive.
In commercial real estate, knowledge isn’t just power. It’s protection.
Allen C. Buchanan is a principal with Lee & Associates Commercial Estate Services in Orange. He can be reached at abuchanan@lee-assoicates.com or 714-564-7104.
