A Phase I Environmental Site Assessment, or a Phase I ESA, is typically the first step in the environmental due diligence process that identifies potential environmental concerns for a property. A Phase I ESA is useful for a potential purchaser to understand environmental issues they may be inheriting. The current and historical operations of the property, as well as offsite operations, are evaluated to determine if soil, soil gas, and groundwater have the known or likely potential to have been impacted. Phase I ESAs are conducted in accordance with ASTM E1527-13 and can satisfy part of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) requirements for innocent landowner defense under All Appropriate Inquiries (AAI).
Why get a Phase I ESA?
- Obtaining a Phase I ESA can help to protect prospective purchasers and help to provide landowner liability protection.
- Being aware of environmental concerns allows for informed evaluations of risk, as well as identifying potential future environmental liabilities and costs ahead of time.
- Environmental due diligence allows a potential purchaser to facilitate advanced planning in order to minimize future project delays and/or complications. For example, a Phase I ESA may identify an underground storage tank that needs removal, which can be addressed prior to construction. If not identified before construction, that underground tank could bring an entire site development to a halt once discovered.
- Phase I ESAs can identify concerns that may need to be addressed to ensure protection of tenants or onsite residents from potential exposure to contaminants.
What can you expect during the Phase I ESA process?
- Site Reconnaissance: Your environmental consultant will visit the property to learn about the operations, observe the existing property conditions, and look for current or past indicators of environmental concerns. This site reconnaissance will include a complete tour of the interior and exterior of the property.
- Interviews: During the interview phase, your consultant will speak with current and past property owners, operators, and occupants, as well as government officials, to gather information about the uses of the property.
- Regulatory Records Review: Environmental records will be reviewed through local, state, and federal regulatory agencies to determine if there have been known or suspected releases at or near the property. Regulatory databases reviewed are related to items such as underground storage tanks, remediation, cleanups, and hazardous waste disposal.
Common Misconceptions about Phase I ESAs
There are some common misconceptions of what a Phase I ESA is and what it includes. Here are some clarifications on what a Phase I ESA does not provide:
- A Phase I ESA is not valid forever. A purchaser may have a Phase I ESA report from 2 years ago. While the information in the report is likely useful, there is a “shelf life” for Phase I ESAs. The items in the report remain valid for 180 days. A new Phase I ESA update or report would be necessary for any future property transaction.
- Not every person who has a copy of the report can rely on it. The Phase I ESA only grants liability protection to the entity for whom it was prepared. Because a copy has been shared with a potential purchaser, that does not mean other entities can rely on the ESA. The original report preparer should be able to provide a reliance letter to new entities, but the 180-day validity of the report should be considered.
- Phase I ESAs do not provide an ironclad defense against all liability. Certain other criteria must be met for a purchaser to establish landowner liability protection.
- A Phase I ESA does not include sampling. The Phase I ESA process does not include collecting samples of soil, soil vapor, or groundwater. The Phase I ESA identifies the potential for the release of hazardous substances but does not include sampling of any specific media.
- Some environmental items are beyond the scope of a Phase I ESA. Consideration of items such as asbestos, lead-based paint, or mold are not included in the scope of a Phase I ESA. However, the environmental consultant can typically include a precursory assessment of the items as an add-on to the Phase I ESA.
What to Expect in the Final Report
Your environmental consultant will present their Environmental Professional Opinion in the Phase I ESA report. The conclusions of the report will identify whether or not contamination is known or suspected to be present at the property. The following are the types of findings generally identified per ASTM:
- Recognized Environmental Condition (REC) – A REC identifies known contamination or the potential for contamination. This can be from either onsite operations or offsite operations at a nearby property.
- Controlled REC (CREC) – A CREC is similar to a REC in that known contamination is present but has controls in place, which have been approved by the applicable regulatory agency, that allow the contamination to remain in place. The controls may limit future uses or redevelopment of the property.
- Historical REC (HREC) – An HREC is a past release of hazardous substances/petroleum products that has been remediated to below residential standards per the applicable regulatory agency and has been issued regulatory site closure with no land-use restrictions.
- Business Environmental Risk (BER) – A BER is defined in ASTM E1527-13 as a “risk which can have a material environmental or environmentally-driven impact on the business associated with the current or planned use of a parcel of commercial real estate, not necessarily limited to those environmental issues required to be investigated in this practice.” BERs can include items such as hazardous waste left onsite that would require disposal, an underground storage tank that would require removal, or lead-based paint.
- De minimis condition – A de minimis condition is an environmental condition that does not represent a REC and would not require action if brought to the attention of a regulatory agency. A typical example of a de minimis condition is a small, limited area of petroleum staining on pavement that is not indicative of a release to the underlying soil.
- Data gap – A data gap is a missing piece of information that could not be obtained during the Phase I ESA. This could be the inability to access a locked room on the property, the inability to interview the property owner, or a lack of response from the regulatory agency. Data gaps may or may not limit the ability of the environmental consultant to identify RECs.
Plenty of variables affect success in real estate transactions and development. Burying your head in the sand when it comes to potential environmental issues – especially if that sand is contaminated – won’t do you any favors. The more you know, the more you’re positioned for success. That’s the job of an environmental due diligence consultant – to provide you with the best possible historical overview of your property’s use and its potential for environmental problems that may affect the site’s future use or create liability issues.
Posted in Insights/Innovation.