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Phase I Environmental Site Assessment | Environmental Due Diligence for Commercial Land Purchase

Updated on April 17, 2016

Environmental Due Diligence | Phase I Environmental Site Assessment

A Phase I Environmental Site Assessment Looks At Many Data Sources To Evaluate a Commercial or Industrial Property's Environmental Liabilities
A Phase I Environmental Site Assessment Looks At Many Data Sources To Evaluate a Commercial or Industrial Property's Environmental Liabilities | Source

Many prospective commercial and industrial property buyers do not understand the environmental due diligence requirements for property purchase. There are a number of environmental due diligence steps in the process of purchasing a commercial or industrial property, which are primarily driven by lenders that want to understand the environmental risks associated with a property that they are lending money for and may someday own through foreclosure. The initial step is to perform a Phase I Environmental Site Assessment (Phase I ESA). A Phase I Environmental Site Assessment examines many environmental data sources to evaluate a commercial or industrial property's environmental liabilities. A Phase I Environmental Site Assessment does not include any intrusive work (i.e., digging holes and testing soil or ground water), and only concentrates on what can be found out about a property by doing a site inspection, interviews, file reviews, and environmental database searches.

A Phase I Environmental Site Assessment , conducted in accordance with the American Society for Testing and Materials (ASTM) standard practice for environmental site assessments (Designation: E 1527-05), is a national environmental due diligence standard in the United States that is performed by a prospective buyer that is considering the purchase of a commercial or industrial property. A Phase I Environmental Site Assessment is required by most lending institutions prior to the approval of a commercial or industrial property loan to identify environmental conditions at the property that may adversely affect the property value. Completion of a Phase I Environmental Site Assessment on a prospective property provides a property buyer “innocent purchaser” protection under Federal law, known as All Appropriate Inquiries. Some States have additional due diligence requirements that provide a property buyer “innocent purchaser” protection under State law.

Phase I Environmental Site Assessment | Environmental Due Diligence for Property Purchase

A typical Phase I Environmental Site Assessment costs between $2,500 and $3,000 for a three to four week turnaround. The purpose of a Phase I Environmental Site Assessment is to develop a historical understanding of potential environmental impacts that may have occurred at a property and to identify potential environmental hazards on a property, which are known as Recognized Environmental Conditions (RECs). Environmental impacts and hazards are identified and quantified to evaluate their impact on the value of a property. Lenders do not want to provide a loan for a property that has environmental liabilities that are in excess of the value of the property, since the lender could potentially gain ownership of the property, if the borrower goes into default on the loan. To protect their interests, lenders often have their own Phase I Environmental Site Assessment requirements that go beyond what ASTM Designation: E 1527-05 requires for environmental due diligence. Lender requirements include environmental concerns that are not required to be investigated per ASTM Designation: E 1527-05, such as: asbestos, mold, lead-based paint, lead in drinking water wetlands, radon, vapor intrusion, and indoor air quality.

A Phase I Environmental Site Assessment consists of: a site inspection at the property under consideration by a qualified Environmental Professional, interviews with knowledgeable parties, a search of federal and state environmental databases, a review of the current United States Geological Survey map, a review of historical aerial photographs, a review of property tax files, a review of Sanborn Fire Insurance Maps, and a local records search at the municipal offices that could contain files regarding the property. The findings of a Phase I Environmental Site Assessment are presented in a report prepared and signed off by Environmental Professionals, whom are qualified to perform environmental due diligence. A Phase I Environmental Site Assessment report includes a detailed property description, details regarding the findings of the Phase I Environmental Site Assessment, and a section that outlines the opinions and conclusions of the Environmental Professional that performed the Phase I Environmental Site Assessment. The opinions and conclusions section outlines the RECs that were found at a Property and provides recommendations for additional environmental due diligence regarding the RECs, if necessary.

Additional environmental due diligence that implements the recommendations provided in a Phase I Environmental Site Assessment report would typically include a Phase II Site Investigation (subsurface investigation), which would involve the installation of soil borings or temporary ground water monitoring well points to investigate areas on a property that may have impacted soil or ground water at the property. A Phase II Site Investigation could also include additional environmental investigation, as necessary, such as an asbestos survey or lead-based paint survey, based on the findings and recommendations included in the Phase I Environmental Site Assessment report.

Cheaper Alternatives To A Phase I Environmental Site Assessment

A less expensive and faster alternative to a Phase I Environmental Site Assessment is a Transaction Screen, which is performed in accordance with ASTM E1528-06, “Standard Practice for Limited Environmental Due Diligence: Process.” A Transaction Screen is suitable for property transactions in which no lender is involved and the prospective buyer would like to perform limited due diligence to ensure that they have some understanding of environmental conditions at the property prior to finalizing the purchase of a property. A Transaction Screen can also be utilized when a property lease or refinancing is being pursued, and an update of the environmental condition at the property is needed. A typical Transaction Screen can be completed in two weeks and costs less than $1,000.

Another popular alternative to a comprehensive Phase I Environmental Site Assessment is a search of the environmental databases that are used to prepare a Phase I Environmental Site Assessment. Database searches are often utilized by prospective property buyers that are in the early stages of due diligence concerning a property they are interested in buying. They provide a limited but useful amount of information about the environmental condition of a property under consideration and the area surrounding the property. A typical search of the environmental databases can be completed in as little as one week, and costs $750 for the database searches and a review letter that provides a professional review of the findings. This option can be customized to suit a client’s due diligence needs, including a site visit and/or file review to gain a greater understanding of a property under consideration for purchase. The information obtained during the preliminary due diligence efforts can be included in a Phase I Environmental Site Assessment, should one be necessary at a future point during the property purchase transaction.

Phase I Environmental Site Assessment Changes In 2013

For the first time since 2005, ASTM will issue a new standard during 2013 for Phase I Environmental Site Assessment, called ASTM E1527-13. The standard is scheduled to go in effect on November 13, 2013. The following are some of the key changes to the 2013 changes to the ASTM standard for Phase I Environmental Site Assessment:

  • Clarification of the term Recognized Environmental Condition (REC) to make it easier to understand. REC is now consistent with the United States Environmental Protection Agency (USEPA) definition of a release, which excludes releases within a building (such as a drum) that do not impact the environment (soil or ground water) ;
  • Clarification of the Historical Recognized Environmental Condition (HREC) definition, to limit it to “a past release of any hazardous substance or petroleum products that has occurred in connection with the property and has been addressed to the satisfaction of the applicable regulatory authority”;
  • A proposed new term called Controlled Recognized Environmental Condition (CREC), which includes RECs that have engineering or institutional controls in place to contain or restrict the use of contaminated areas, otherwise known as Activity and Use Limitations (AULs). CREC was created to clear up confusion associated with HRECs that do not have any activity or land use limitations;
  • Expanded language on agency file review requirements and user responsibilities regarding file reviews for the subject property and adjacent properties. Places the onus on the Environmental Professional responsible for preparation of a Phase I report to justify why a file review is not needed on the subject property and adjacent properties, if one is not performed; and
  • New language that specifies that vapor intrusion must be considered as a Recognized Environmental Condition (REC) contaminant pathway in a Phase I report. An ASTM E2600 vapor encroachment screening is specially mentioned as not being a requirement of ASTM E1527-13, and it is assumed within the environmental industry that vapor intrusion contaminant pathways will be addressed as a section within Phase I reports that use information collected during the Phase I process to make assumptions regarding potential vapor intrusion contaminant pathways at a site.


What Is Environmental Due Diligence? The Phase I ESA

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    • profile image

      Paul Scardino 

      7 years ago

      Nice overview. Well written; very helpful. Thanks

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