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The Value of a Phase I Environmental Site Assessment in Northeast Ohio

It is critical for owners, potential owners, and operators of CRE assets to protect themselves from liability associated with environmental contamination present on sites of interest.

A Phase I Environmental Site Assessment is the commercial real estate industry due diligence standard for evaluating environmental liability and risk associated with a real estate asset of any type: industrial, commercial, mixed-use, multifamily, etc. A Phase I ESA is conducted before buying or selling any property and will include a site visit, research historical records, maps and directories, and review permitting and zoning for your property. The ASTM E1527-13 standard, upon which Phase I ESAs are conducted, was based on the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), enacted in 1980, whose primary purpose was to give the federal government the ability to respond to releases or threatened releases of hazardous substances, and to pursue polluters ("responsible parties") or potential polluters ("potentially responsible parties") for the cleanup of contaminated sites.

It is critical for owners, potential owners, and operators of commercial real estate (CRE) assets to protect themselves from liability associated with environmental contamination present on sites of interest. Moreover, property location may have a direct impact on presence of contamination. Is it in an urban, highly-developed area such as Cleveland or Akron, where industrial properties or factories may have released environmental contaminants? Even if the property is vacant or undeveloped, do adjacent properties pose a potential risk? For lenders or investors, conducting environmental due diligence as part of sound risk management practices are able to determine the following: to gauge whether environmental issues may be present that could cause a borrower financial hardship; for CERCLA liability protection during a foreclosure (to be on the safe side); or to gauge whether a property might have a reduced selling price due to contamination, to name a few reasons. Local Ohio consultants can provide experienced due diligence assessments through knowledge of historical precedent, Ohio laws and regulations, as well as entrenched relationships.

Ohio is currently in the midst of transforming the urban core in Downtown Cleveland and there have been at least two dozen buildings in the past few years which converted from offices to hotels and residential/commercial retail buildings. Nevertheless, there are enormous growth opportunities for urban revival in Cleveland, including the Downtown area and Midtown, as well as Akron. The hot Ohio multifamily housing market has resulted in spillover into rural areas, which presents lenders and developers with opportunities to further grow and expand these exurb communities. Ohio is also one of the Rust Belt states that has been offering incentives to breweries, an economically blossoming but capital-intensive industry. 

The robust commercial real estate development across all swaths of Northeast Ohio necessitates careful, meticulous pre-transaction due diligence, starting with a Phase I Environmental Site Assessment. A Phase I ESA will examine potential contamination of soil and groundwater, as well as vapor encroachment from hazardous materials or petroleum products. Development sites near Lake Erie take this into additional consideration as our primary source of drinking water. The presence of harmful algae blooms due to fertilizer use, for example, threatens the water supply of Lake Erie residents in Toledo.

Smart commercial real estate transactions involve meticulous risk assessment for all stakeholders, creating investment strategies and avoiding long-term asset liability. In any transaction, you should decide what your appetite for risk is and act accordingly—are you comfortable doing your basic due diligence or do you want to dig deeper and have an extensive plan crafted by seasoned due diligence consultants to resolve what could possibly be uncovered? These are just a few examples of hiring a local consultant who is familiar with Ohio’s unique environmental and development concerns is imperative.

Jennifer Giuliano