If you are considering purchasing a commercial real estate property, you may have heard the term Phase I Environmental Site Assessment (ESA). So, what is a Phase I ESA? What is the process and why is it important? We break down the specifics regarding the main component of completing environmental due diligence on a property because the more you know going into the transaction, the better your risk is managed.
What is a Phase I ESA?
A Phase I ESA is often the first step of the environmental due diligence process and is completed prior to the closure of a real estate transaction. It outlines the current and historical use of a property and provides recommendations for next steps if Recognized Environmental Conditions (RECs) are identified. Phase I ESAs are used for all types of real estate transactions including new purchases, property development, bank financing, refinancing, and foreclosures.
The purpose of conducting a Phase I ESA is to obtain innocent landowner protections. The environmental due diligence process is required by law under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). A Phase I ESA is the most common way to satisfy the requirements of CERCLA’s innocent landowner defense under All Appropriate Inquiries (AAI), known as landowner liability protections (LLPs). If the due diligence process is not properly completed and LLPs are not satisfied, the property owner would be financially and legally responsible for environmental liabilities on the property.
LLPs include three categories, which do not necessarily apply to all purchasers:
• Innocent Landowner
• Contiguous Property Owner
• Bona Fide Prospective Purchasers (BFPPs).
The Innocent Landowner designation is for owners who did not know, and had no reason to know, the property was contaminated. Contiguous Property Owner includes prospective landowners who purchase a property with the knowledge that contamination has migrated from a contiguous property. They can obtain protection from liability, provided they meet certain pre- and post- purchase requirements. BFPPs are prospective landowners who purchase a property with knowledge of contamination and obtain protection from liability, provided they meet certain purchase requirements like the Contiguous Property Owner.
What is the Phase I ESA process?
The first step a consultant goes through in gathering information for the assessment is reviewing records and historical sources. The consultant will look at aerial photographs and Sanborn maps dated as far back as are available. He or she will also review topographic maps, city directories, Environmental Database Map Report (EDR report, and local, state, and federal government records). Areas of concern, such as locations of oil drums found on old Sanborn maps, are noted for inspection during the site walkthrough. The consultant checks if the property has ever contained businesses which are known to use hazardous substances (such as gas stations and dry cleaners) and the years those businesses operated.
The next step is the site walkthrough. The consultant visually inspects the entire property and takes pictures for the written report. Particular focus is placed on anything that could lead to an environmental concern, such as an unaccounted vent pipe. Ideally during this time, interviews with the current or former owners and operators of the property would also take place.
The consultant then compiles the assessment into a comprehensive report. The report includes the historical research found on the property, as well as photographs, a data summary, appropriate appendices, and recommendations for next steps based upon the findings.
What does a Phase I ESA conclude?
One of the main components of a Phase I ESA is to conclude whether any RECs are present on the property, which could pose a threat to the environment and/or human health. A REC is the presence or likely presence of any hazardous substances or petroleum products in, on, or at a property. The actual sampling of soil, air, groundwater, and/or building materials is typically not conducted during a Phase I ESA, so RECs are determined by reviewing records, examining historical sources, conducting interviews with individuals knowledgeable about the property, and a thorough site-walk by a qualified consultant.
The report also concludes if any Historical Recognized Environmental Conditions (HRECs) or Controlled Recognized Environmental Conditions (CRECs) are present on the property. HRECs are past, reported releases of any hazardous substances or petroleum products that has occurred in connection with the property and has been addressed and remediated to the satisfaction of the applicable regulatory authority or meeting unrestricted residential use criteria. It does not subject the property to any required controls.
A CREC is similar to an HREC in that it is a recognized environmental condition which involves a past release of hazardous substances or petroleum products that has been addressed to the satisfaction of the applicable regulatory authority but differs in that the hazardous substances or petroleum products are allowed to remain in place but are subject to required controls. These controls may include refraining from drilling a well for drinking purposes or installing a vapor barrier and conducting quarterly testing.
If no RECs are found, due diligence ends with the Phase I ESA. Should any RECs be identified, the next step is to investigate them by conducting a Phase II Environmental Site Assessment (ESA). This assessment samples the soil and groundwater in the areas of concern to determine if contamination is present and posing an environmental health risk. If the contamination tested falls within acceptable state requirements, no further due diligence is required. Should the contamination tested be above state acceptable levels, the last step in the due diligence process is to remove any hazardous materials and remediate the site.
How long is a Phase I ESA good for?
Phase I ESAs are created to serve as an independent professional opinion of the environmental condition of a property at a single point in time. They are not meant to predict the property’s environmental status in the future. Phase I ESAs are completely valid within 180 days of completion. Ideally, closure of the real estate transaction would happen in this timeframe. If completed between 180 and 365 days, then the Phase I report would still be valid but must be updated where necessary. If the Phase I ESA was completed more than one year – 365 days ago then it must be re-completed as it is no longer valid. Any new activity on the property or on surrounding properties could have an impact on the value of a property.
PM Environmental, Inc. has extensive experience completing Environmental Site Assessments and Engineering Reports. We are approved by major capital markets lenders and brokers. PM’s qualified staff is comprised of engineers, architects, geologists, and former bank environmental risk managers. Contact PM today to speak with one of our professionals about your next commercial real estate transaction.