Phase I Environmental Site Assessments

A due-diligence “must” in your next commercial real estate transaction

This commercial property might be the dream spot for a new business, or it could be the beginning of an environmental nightmare. Getting a Phase I ESA is a good start toward ensuring there are no post-close environmental surprises discovered on your new commercial property.

If you are thinking of buying commercial real estate, due diligence is of paramount importance to all parties involved.  Phase I Environmental Site Assessments are an absolute “must” before purchasing or selling commercial properties.  This type of assessment is a lot like a home inspection prior to purchasing a residential dwelling, and it serves to protect all parties from litigation after the sale of the property is completed.

One of the major concerns in any commercial real estate transaction is that of environmental liability associated with activities by the current and previous landowners.  All parties will want to know whether the property in question has previously been used in a way that could have a negative impact on the environment or on the health and safety of people located on or around the property.  This is especially true given that U.S. courts have held that under CERCLA rules, current property owners, lessors, and creditors may be held responsible for remediation of environmental hazards, even if those hazards were created by a previous property owner or lessor. 

Some properties have been used for business purposes that are readily associated with environmental concerns, such as gas stations, dry cleaners, and manufacturing facilities.  Other types of properties may not have obvious concerns, yet may have hidden issues that the current property owner may be unaware of.  For example, an undeveloped parcel located near a manufacturing plant may have groundwater that has become contaminated because of the neighbor’s business activities.  These types of environmental hazards can scuttle business plans and – if not addressed prior to closing on the real estate transaction – can lead to years of litigation between the involved parties, not to mention fines and other governmental sanctions. 

To protect against discovery of “surprise” environmental liabilities after closure of a commercial real estate transaction, all parties should agree to solicit a Phase I Environmental Site Assessment (also known as a Phase I ESA) to be performed by a third-party environmental consulting firm such as Spectrum Environmental Services, Inc. (Spectrum).  Completion of a Phase I ESA prior to closure of the real estate transaction provides the basis for assertion of CERCLA’s “Landowner Liability Protections (LLPs)” should environmental hazards be discovered on the property after the transaction is completed.

Nearly all Phase I Environmental Site Assessments must comply with "Standards and Practices for All Appropriate Inquiries" as found in 40 Code of Federal Regulations, Section 312.  As such, Phase I ESAs usually include the following items:

·         A visit by an associate of the environmental firm performing the Phase I ESA to the property in question to physically inspect the property for current and past conditions and uses

·         Interviews with current and previous property owners, lessors, and neighbors regarding current and prior property use

·         Evaluation of records related to current and historic structures that were on the property, such as tanks, silos, etc.

·         Evaluation of adjacent properties that may pose current or future environmental concerns

·         Inspection of aerial photos, topographical maps, and other documents related to how the property is situated and relates to other properties in the area

·         Review of governmental records related to permitting and previous land usage

·         Review of agency databases related to the release or storage of hazardous materials

·         Review of title or judicial records related to the potential existence of liens or use limitations

Phase I Environmental Site Assessments may also include observations related to other concerns related to the property in question, such as the potential presence of lead-based-paint, asbestos, mold, heavy metals contamination, and radon gas.  The presence of wetlands, threatened or endangered species, and geologic hazards such as debris flows and earthquake fault lines may also be included if noted during the assessment process.   These are not typically addressed in a Phase I ESA but can be included upon request or if noted as a potential concern during the assessment process.  Spectrum’s staff is prepared to provide these additional services, if necessary.

Depending upon the proposed use of the commercial property in question as well as the source of funding for the real estate transaction, there may be additional items included in the Phase I ESA report.  A proposed land development involving the U.S. Department of Housing and Urban Development (HUD), Fannie Mae, Freddie Mac, or the Small Business Association (SBA) may have specific questions that they will want addressed prior to funding a commercial real estate transaction.  Spectrum  is well-versed in addressing these types of concerns and can ensure that those details are addressed when performing these types of Phase I ESAs.

The completion of a Phase I ESA can drastically affect the next steps of the commercial real estate transaction.  An assessment that finds no cause for concern can reassure all parties that the property in question is suitable for the buyer’s intended use.  However, a Phase I ESA that identifies one or more concerns will certainly cause the buyer and any potential creditors to want additional details that will likely come from a Phase II Environmental Assessment.  The Phase II ESA is a more in-depth analysis of the property in question, focusing in on the specific concerns identified in the Phase I ESA with soil, water, and/or air testing designed to quantify the source and scope of those environmental hazards.  In the event that a Phase II ESA is required, Spectrum Environmental Services can provide all of the services needed for this type of assessment.

If you are a buyer, potential creditor, or are planning to sell a commercial real estate parcel in the future, contact Spectrum Environmental Services today to get started with your Phase I Environmental Assessment!