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How a Phase I ESA Can Save You

The Value of a Phase I Environmental Site Assessment

The Phase I Environmental Site Assessment is one of the most important tools used during the due diligence stage of commercial real estate transactions. Those buying or refinancing a property know they should assess the environmental condition of the asset, but some might be unclear about the specifics of a Phase I ESA. What exactly does this assessment entail, and why is it so critical?

What is a Phase I ESA?

A Phase I Environmental Site Assessment is the first step in the environmental due diligence process. It is an investigation that summarizes findings of a site visit and historical review of a subject property and the adjacent area to identify possible environmental concerns, and determine if any additional investigation is necessary. The Phase I ESA attempts to answer questions such as: What was previously on the identified property? Did any activities contaminate the soil or groundwater underneath the site? Are any hazardous materials or chemicals in use at the sight? How have they affected the site in question as well as the surrounding area? Etc.

Importantly, a Phase I ESA is limited to a visual inspection along with a documentation review. For more details on the Phase I ESA scope of work see here.)  Should concerns or contamination be identified, your consultant will likely advise a Phase II Environmental Site Assessment which includes the analysis of samples to be conducted to fully understand the risks associated with a subject property. 

Simply put, the purpose of a Phase I Environmental Site Assessment is to use reliable methods to isolate the risk of any current or potential environmental conditions that may exist or impinge on a real estate property in order to protect against bad business decisions or liability risks. To qualify for CERCLA liability protection (more on that below), the investigation must be performed respecting ASTM standards (ASTM E1527-13 is the most recent standard that applies to Phase I ESAs). Phase I Environmental Site Assessment must be performed by a trained environmental professional who meets the requirements of the EPA’s All Appropriate Inquiry (AAI) Standard. So think twice before hiring your neighbor’s son to conduct the environmental assessment! 

Why should you get a Phase I Environmental Site Assessment?

As mentioned, getting a Phase I ESA helps the commercial real estate industry make better business decisions and may protect buyers from becoming liable for contamination that exists at a site they purchase. Have you ever heard of a “Superfund” site? The Superfund - also known as the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) - is an environmental program that was created as the responsible party for cleaning up abandoned hazardous waste sites. In response to the growing number of highly contaminated properties around the country, the United States Congress established CERCLA in 1980 to be able to hold those who contaminated a site, or are potentially responsible for polluting it, accountable for the cleanup cost. Under CERCLA, someone who buys a property can avoid becoming a “potentially responsible party” for any existing contamination by conducting what is known as All Appropriate Inquiry (AAI). AAI requires that a Phase I ESA is performed, and grants the buyer “Innocent Landowner Protection”.

Without doing a Phase I ESA, property buyers can be left liable to clean up contamination they didn’t cause. If contamination is uncovered on the site, or determined to be migrating onto a neighboring site, the new owner could wind up paying for the clean-up - which can cost hundreds of thousands or even millions of dollars. Skimping on due diligence costs by not doing a phase I before purchasing a property can end up being a costly mistake! Similarly, the Phase I ESA is an important risk management tool for lenders because it provides critical information about environmental risks at a site that may impact the borrower’s ability to repay the loan. 

The Requirement for Phase I ESAs

Phase I Environmental Site Assessments are used by almost everyone across to commercial real estate industry for three primary reasons: to understand whether a property will be a smart investment; to protect purchasers from liability; and to fulfil lenders’ requirements in order to obtain a loan.  

Phase I ESAs performed to the ASTM E1527-13 Standard are a very cost-effective screening tool to save you from making a poor investment or becoming liable for a mess you didn’t create, and to meet the basic underwriting requirements of most lenders. When it comes to environmental due diligence, spending some money upfront can save you a lot of money in the long run!