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Environmental Due Diligence Concerns in the Affordable Housing Market

March 18, 2021

Affordable housing refers to residential complexes developed to meet the needs of those on fixed or subsidized incomes, including families, seniors, veterans and those transitioning from homelessness. 

Affordable housing initiatives can be found in communities big and small, in urban, suburban and rural areas. Some projects involve constructing new complexes; others, rehabilitating or repurposing existing structures.  

The market is attractive for real estate investment in part because of a range of financial support available from various local, state and federal agencies, including low interest loans, subsidies, tax credits and vouchers. But accessing government incentives means conforming to government requirements, including a range of environmental regulations. 

Here, PM Environmental’s due diligence team addresses a few of the most common concerns voiced by clients involved in developing affordable housing projects.

“Multi-unit projects already involve so many moving parts. Why does qualifying for affordable housing incentives add so many more?”  

Simply put, partnering with a government agency for financial assistance means integrating their priorities, including protecting the wellbeing of citizens and the environment, into your project. 

Complexity results from each participating federal, state, and local agency having its own environmental requirements. When a deal is enhanced by combining incentives from more than one agency or program, one result can be a puzzle of similar yet distinct regulations which can span the entire course of the project, from planning to groundbreaking to occupancy.

“Does it really have to take so long?”

Partnering with one or more government agencies means adjusting to their processes and their backlogs. As difficult as that can be, it is best to recognize that their timelines become yours, not the other way around, and to plan ahead accordingly.

In Michigan, for example, the process of document review and reporting required to close a Michigan State Housing Development Authority (MSHDA) loan typically takes a year or more. When dealing with regulatory agencies, the best rule of thumb is to begin the environmental review process as early as possible. 

“I’ve developed several affordable multi-family properties. Why has each had a different set of environmental hoops to jump through?”  

A combination of variables determines which due diligence steps a given project might trigger, including:

Government stakeholders 

Development incentives are offered by state entities such as MSHDA, and federal authorities such as the U.S. Department of Housing and Urban Development (HUD). A different mix of stakeholders means a different mix of regulatory requirements.  

Funding cycles 

Agencies commonly offer a finite amount of affordable housing support each year, in predictable funding cycles. During each cycle, developers submit proposals to be considered for those resources. 

For example, in Michigan, MSHDA offers various programs and loan opportunities throughout each calendar year. The most lucrative (a round of 9% tax credits), and therefore most competitive are awarded based on a scoring system that takes into account multiple factors, including location, proposed type of affordable housing, and even walkability. Alternatively, other programs including Housing Trust Fund, Direct Lending, HOME/GAP Financing, Bridge Loan, etc., are awarded on first-served basis. 

An agency might also prioritize different goals at different times, such as placing greater emphasis on opportunity zone projects in one cycle, rural locations in another. 

Project parameters

The developer’s plans for the site also impact the due diligence steps required. Does the project involve new construction, a major renovation of an existing building, or minor changes to a structure? What environmental concerns arise from how the property was used in the past? 

“What can I do to avoid surprises?”  

Not building enough time into the project plan for environmental due diligence is probably the biggest driver of unexpected setbacks. The best way to avoid surprises is to assume you’ll have them.

While some aspects of due diligence may come as a surprise, one sure thing is the Phase I Environmental Site Assessment (ESA). A Phase I ESA, which details the past and current use of a property and outlines next steps if recognized environmental conditions (RECs) are identified, will always be part of the documentation required to be considered for affordable housing support.

In Michigan, if a REC is identified during the Phase I ESA, a Phase II ESA will be required to quantify the extent of contamination in soil and ground water. Once the specifics are confirmed, a mitigation plan is developed. 

The plan, called a Remedial Action Plan or Response Activity Plan (RAP), details the different clean-up steps and the associated costs and timeline. The RAP approval process can be time consuming, as it must be reviewed and approved by applicable regulatory agencies. While these are the required steps in Michigan, developers can expect similar processes in other states.

Another common source of frustration for developers is navigating the National Environmental Policy Act (NEPA). In the affordable housing market, any funding that originates from a federal source — even if it is administered through a state or local municipality (Responsible Entity) — will only be released once a developer demonstrates compliance with NEPA’s widespread protections of people, wildlife, and historical and natural resources. 

NEPA requirements fall into 14 different categories. Federal and state agencies coordinate to oversee NEPA compliance. Some are location-specific and are not relevant to most sites, like protections specific to coastal land or land near a civilian or military airfield. 

Others, such as safeguards against contamination from hazardous substances, come into play more often. Within that category, it’s important to note that many Responsible Entities require radon testing, asbestos containing materials surveys and/or lead-based paint testing for the rehabilitation of an existing structure, regardless of the location or the extent of proposed changes.

Highlights from just a few NEPA categories reinforce the need for contingency planning to accommodate “surprises”:

Historic preservation

NEPA has long included provisions for preserving sites with historic value, but the compliance process in Michigan has recently changed. In the past, the process could be coordinated by an architectural historian, like the one on staff at PM Environmental. Now, a separate archeological review by a credentialed archaeologist is required in addition to the architectural review. 

As the name implies, this could mean a “deeper dig,” going beyond protecting structures with historic significance to perhaps preserving remnants of history that rest underground. Developers may think they have acted to preserve a building’s history, only to be asked to dig up the adjacent parking lot as well.

Endangered species

NEPA also regulates land usage as it impacts endangered species. Recently, trees on several PM clients’ job sites have been determined to be potential habitats for endangered bats. NEPA may approve a plan that includes removing trees, but their specified time frame for doing so may conflict with the project timeline. For example, construction planned for summer may be delayed if trees deemed bat habitats cannot be removed until the fall.

Flood zone areas

Areas classified as flood zones are also protected by NEPA, which many Responsible Entities also require all ingress/egress areas including roadways leading in and out of a development in such an area be one foot above the base flood level. Additional time and cost will be added to the project if elevation surveys are necessary to update outdated floodplain maps, in addition to completing NEPA’s 8 Step Decision Making Process for Floodplain Management. If it is not feasible to raise a roadway’s elevation, the housing project is prohibited from moving forward. 

The bottom line: Hope for the best, but plan for the worst.

Difficult as it may be, the best strategy for navigating environmental compliance in the affordable housing segment is to build as much time into project plans as possible. And don’t go it alone. Look to the due diligence specialists at PM Environmental for help every step of the way.

 

PM Environmental’s National Due Diligence Manager, Kristin Gable, and Regional Due Diligence Managers Carey Kratz and Jackie Schafer contributed to this article.