Phase I Environmental Site Assessment for HUD Loans

Key points

• HUD's purpose is to document compliance with 24 CFR 50.3(i): properties used in HUD programs should be free of hazards that could affect occupant health and safety.
• The ESA must be conducted within one year of submission to HUD, and updated if more than 180 days old.
• HUD requires a vapor encroachment screen under ASTM E2600 and lists HUD as an authorized user.
• Any recognized environmental condition (REC) generally requires a Phase II ESA, and HUD may require one even when the preparer finds no REC.
• HUD posts HEROS documentation, including the Phase I, publicly for one year.

What a Phase I ESA does for HUD

A Phase I is a fact-finding report. The environmental professional reviews current and historical uses of the site and nearby properties, regulatory databases, interviews and a site visit to identify recognized environmental conditions. It can also serve the owner's purposes, since it can satisfy EPA's All Appropriate Inquiries rule for CERCLA liability protection. HUD's purpose is narrower and stricter. The MAP Guide explains that HUD must document compliance with 24 CFR 50.3(i), which requires properties proposed for HUD programs to be free of contamination where a hazard could affect the health and safety of occupants or conflict with the intended use. HUD's requirements can exceed state standards partly because HUD may end up owning a property after a default.

HUD-specific requirements

Under the MAP Guide, the Phase I must be prepared under ASTM E1527 (the Guide cites E1527-13 and requires the most recent edition in force), with additional items the lender must pass to the preparer.

• The report must state HUD's 50.3(i) purpose and say whether further investigation or corrective action is recommended to meet it.
• It must follow the ASTM report format and include a Tier 1 vapor encroachment screen under ASTM E2600.
• HUD must be named as an authorized user, and the preparer must know HUD will post it online.
• The borrower or current owner completes the ASTM user questionnaire.
• Findings must list RECs, controlled and historical RECs, de minimis conditions and vapor encroachment conditions, with opinions explaining why any finding is or is not a REC and identifying data gaps.

Timing rules

The ESA is conducted on the earliest of the site visit, records review or interview dates, and that date must fall within one year of submission to HUD. A Phase I conducted more than 180 days before submission, but within the year, must be updated under the ASTM standard. A report prepared more than one year before submission is not acceptable even if updated. The complete, final Phase I (summaries are not accepted) goes in with the pre-application, or with the firm application when there is no pre-application, as part of the HEROS submission.

For bridge-to-HUD borrowers this matters because the Phase I ordered for the bridge closing will often be too old by the time of the HUD application. Ask the consultant to prepare the bridge-stage report to HUD's format, so that it can be updated rather than redone.

When findings lead to more work

HUD evaluates the Phase I itself. The MAP Guide states that any Phase I identifying a REC will require a Phase II ESA, unless it can be determined from the Phase I that corrective action is not feasible, in which case HUD may reject the property. HUD may also require a Phase II based on its own toxics policy even if the preparer did not call a finding a REC. A Phase II follows ASTM E1903 and involves sampling, and remediation, if needed, adds cost, time and sometimes ongoing obligations. Previous or ongoing remediation must be fully documented, including any no further action letters from state or local authorities.

Phase I and Phase II work is one of the activities HUD allows before its environmental review is complete, so ordering it early does not create a choice-limiting action problem.

Where to go next

For coordinating bridge and HUD due diligence, see bridge-to-HUD financing.

For third-party report requirements in Bravo's 223(f) loans, see HUD 223(f) loans.

Related guides: Third-Party Reports in a Bridge-to-HUD Execution; Flood Zones and Environmental Review on HUD Loans; Is Your Property Ready for a Bridge-to-HUD Strategy?.

Related terms: HUD Environmental Review: Levels, HEROS and Timing; Capital Needs Assessment (CNA): What It Means in a HUD Loan; HUD Appraisal: How HUD Values a Property for Loan Sizing; What Is a HUD Section 223(f) Loan?.

For portfolio figures by state, metro and program, see the HUD multifamily data hub. Bravo Capital’s record: all 26 HUD firm commitments received since April 2022 have closed, totaling $526.0 million (HUD Closing Scorecard).