By Mark Winterstein
It’s a common question for many new commercial property buyers, “Is a Phase I Environmental Site Assessment (ESA) required?”
Of course, it’s easy to understand. No one wants to spend more money than necessary, and buying a property can be expensive.
But skipping a Phase I ESA, means prospective buyers could be exposing themselves to risks and liability that could have been avoided. A Phase I ESA constitutes ‘all appropriate inquiries’ into the previous ownership(s) and historical uses of the property, and permits the user to satisfy one of the requirements to qualify for innocent landowner defense under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).
When is a phase I ESA required?
The short answer is that federal and state regulations do NOT require a Phase I ESA; however, banks and lenders almost always require it for a commercial or industrial property transaction to protect their loans. Moreover, CERCLA liability protection is only provided when the ESA has been conducted prior to the purchase of the property.
A buyer paying cash can avoid a Phase I because it’s not explicitly required, but that’s likely a bad idea. Most buyers complete one anyway to obtain CERCLA liability protection.
Why Do I need a phase I ESA?
It’s all about liability.
On any piece of property and depending on the former use of the property and surrounding properties, there is potential for adverse environmental impacts due to releases of hazardous substances and/or petroleum to soils and/or groundwater underlying the property.
The purpose of the Phase I ESA is to identify 1) the presence of hazardous substances or petroleum products in, on , or at the subject property due to a release to the environment; 2) the likely presence of hazardous substances or petroleum products in, or, or at the subject property due a release or likely release to the environment; and, 3) the presence of hazardous substances or petroleum products in, on, or at the subject property under conditions that pose a material threat of a future release to the environment, which is defined as a Recognized Environmental Condition.
Often, cleanup costs can reach hundreds of thousands, if not millions of dollars.
The easiest way for banks and individual buyers to protect themselves is to conduct a Phase I ESA before purchasing the property.
Almost no bank will give a loan without a Phase I ESA because it is such an essential tool in protecting lenders from future liability in the event the borrower defaults on the loan. No bank wants a buyer to default on a contaminated property, leaving them stuck with a “dirty” property.
How often are environmental conditions found?
More often than you think.
The worst offenders are usually former gas stations, dry cleaners, or industrial sites. In these cases, environmental professionals find hazardous materials or petroleum releases as often as three out of four times and require further investigations.
Contamination is less likely on a property with an office building, for instance. However, research into prior uses of the property is still an important step.
In many cases, historical property uses which may have had adverse environmental impacts to the property were never addressed if the property was redeveloped prior the mid-1990s, which was prior to the initial ASTM guidance pertaining to environmental site assessments that were outlined in the initial ASTM E1527 standard in 1993.
In one case, CTL assessed a property that in its current configuration appeared as an undeveloped agricultural field. Surprisingly, historical research identified that the property had historically been developed with multiple bulk oil above-ground storage tanks. Through a Phase I ESA, historical research provides buyers with a much clearer picture of what they are purchasing.
How Is a phase I ESA Completed?
Per ASTM standard, an Environmental Professional, or EP for short, must complete a Phase I ESA.
During their investigation, the EP will complete a site visit, conduct a regulatory records search, and interview people knowledgeable about the current and past uses of the property.
Historical data review also includes reviewing historical aerial photographs, Sanborn maps, historical city directions, and regulatory databases. Then they take all that information and conclude if there is a potential for or known hazardous substances and/or petroleum products or, alternatively, no evidence of any adverse environmental impacts.
It is not necessary that every “Known” environmental condition require further action. But if a potential for a past release is identified, the EP will recommend a further subsurface investigation, which would include the collection and analysis of soil and/or groundwater samples to either confirm/deny the presence of a release.
The prospective buyer can then make an informed decision to either walk away or purchase the property depending on their proposed use.
What else should a buyer consider?
The ASTM Standard specifically excludes investigation of ‘business environmental risks,’ i.e., asbestos, mold, lead-based paint, and wetlands, historical and cultural resources, etc., but their presence can cost a lot to the buyer. Although they aren’t RECs, they can lead to extensive abatement or remediation costs when building renovation occurs, the building is torn down, or the property is developed. or the use of the property changes.
While a typical Phase I doesn’t look for those business environmental risks, some clients like request business environmental risks be assessed, as there may be additional costs associated with renovating or razing existing structures.
Want to learn more?
If you are still unsure if a Phase I ESA is right for you, Environmental Professionals at CTL Engineering can help you determine if a Phase I ESA is appropriate in your circumstances.
CTL works throughout the midwest with offices in Ohio, Indiana, Kentucky, Virginia, and West Virginia., Pennsylvania, and Kentucky to examine properties and help buyers make informed decisions.