A Phase I ESA primer

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In 1980, very few entities involved in real estate transactions paid attention to environmental concerns when buying or selling real estate. Since then, the impact of environmental statutes and regulations at both the federal and state level has become so significant that every commercial real estate transaction should involve a consideration of these factors by sellers, buyers, lenders and insurers.

A change in property ownership frequently involves questions of compliance with environmental regulations, as well as the potential liabilities associated with real estate transfer. Buyers want to know if they are purchasing a contaminated site, and lenders want to know if they are lending money with a potential Superfund site as collateral. The possible presence of air pollution, contaminated surface or ground water, hazardous wastes, underground storage tanks (USTs) or a myriad of other pitfalls significantly affects the worth of the property.

Consequently, many buyers, lenders and insurers insist on conducting a Phase I environmental site assessment (ESA) at an early stage in most commercial real estate transactions, because of the risk of incurring either strict liability or joint and several (individual) liability under Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S. Code Sections 9601-9675, often referred to as Superfund.

Superfund implications
Superfund is a comprehensive program that authorizes the U.S. Environmental Protection Agency (EPA) to clean up hazardous waste sites and undertake emergency response actions with regard to releases, or threatened releases of hazardous substances in the environment. The Superfund statute provides for two alternative mechanisms for hazardous waste cleanup and reimbursement. First, EPA can order potentially responsible parties (PRPs) to undertake remedial measures to clean up contaminated properties. Second, EPA can take remedial actions on its own initiative and sue for recovery of its expenses from PRPs. This legislation was designed to replenish the Superfund, totaling approximately $10 billion, through EPA's recovery of incurred cleanup costs from liable parties.

The "innocent landowner" defense
Superfund's strict and joint and several liabilities are broadly imposed. There are three basic exceptions, or defenses, to the liability that can accompany a contaminated site. The first exception is an act of God. The second exception is an act of war. The third is an act or omission of a third party, against which the property owner took all appropriate precautions. This final defense, often called the "innocent landowner" defense, is applicable when the owner has used due diligence in the determination of whether or not the site is contaminated prior to acquisition of the property.

Generally, in order to avoid liability, the purchaser or potential lender must, at a minimum:

1. Inquire into the current and previous ownership and uses of the property;

2. Inquire into the environmental compliance record of all prior property owners, including review of all available public or government records concerning compliance; and

3. Conduct, either itself or through a representative, an actual environmental inspection of the property.

The most recent Superfund amendment, often referred to as the Asset Conservation, Lender Liability and Deposit Insurance Protection Act of 1996, clarifies the scope of lender liability for environmental cleanups. More specifically, this statute identifies the appropriate level of inquiry required of lenders on a foreclosed property with potential environmental cleanup liability. The 1996 Superfund amendment basically spells out how a lender can foreclose on a piece of property used as collateral and not incur the liability to perform an environmental cleanup.

For the most part, the lending institutions have responded to this new statute by incorporating the American Society of Testing Materials (ASTM) standards, a set of voluntary consensus standards, into their customized Phase I ESA reports. Additionally, usually only those environmental professionals who have successfully demonstrated their capability through their experience (i.e., inspector licenses, professional designations, the number of Phase I investigations conducted, etc.) are hired by lending institutions to perform Phase I ESAs.

ASTM standards
The ASTM published Standard E 1528-96 - transaction screening process - in 1996 and Standard E 1527-97 - Phase I environmental property assessment process - in 1997, in an attempt to "synthesize and put in writing good commercial and customary practice for environmental site assessments for commercial real estate; to facilitate high quality, standardized environmental site assessments; to ensure that the standard of appropriate inquiry is practical and reasonable; and to clarify an industry standard for appropriate inquiry in an effort to guide legal interpretation of CERCLA's innocent landowner defense."

The transaction screening process
The transaction screening process is a preliminary inspection of a commercial or residential property. It entails completing a questionnaire and conducting limited research. The performance of a transaction screening does not require the judgement of an environmental professional and may be conducted by the user of the property, or an agent thereof. It may be used by itself, or as a precursor to a full Phase I ESA, depending upon the information obtained. For less valuable properties, it may be all that is necessary to give the parties involved the needed information to make a decision regarding environmental concerns.

The transaction screening process involves questioning both the owners and occupants of the commercial property, a property site visit and a review of readily available government records and standard historical sources.

Typically, environmental professionals who conduct transaction screens may charge between $250 and $500 per property.

Phase I ESA reports
The purpose of the Phase I ESA is to screen a property through the evaluation of existing information that reveals a property's environmental status. The Phase I ESA must be conducted by an environmental professional. His or her professional judgement is vital to the performance of appropriate inquiry at the Phase I level.

The Phase I Environmental Inspection has three distinct categories:

1. Pre-site evaluation through historical review and owner/operator questionnaires;

2. Site inspection through visual observation of the property; and

3. Submission of a written report.

This assessment is usually performed through extensive background review and site visits that consist of the following elements:

  • A history of actual site usage. This task may be done through a review of deed records pertaining to the property, interviews with past and present owners, and a review of available aerial photographs and Sanborn fire maps, if available.

  • A review of available material that could provide information relative to potential liabilities associated with the site. These materials include, but may not be limited to, records, permits and licenses that give information on what has been built or installed on the property. This includes building, zoning planning, sewer, water, fire, federal and state environmental regulatory databases that have information related to the property and neighboring properties.

  • A site reconnaissance of the property and adjacent properties within a 1/2-mile radius of a subject property, to assess the presence of sources of on-site and nearby adjacent off-site contamination with potential impact on the site. The site inspection should characterize the site and identify potential areas of concerns (i.e., hazardous waste storage and disposal, leaking underground and above ground storage tanks, asbestos, lead-based paint, pesticides and herbicides, polychlorinated biphenyls (PCBs), radon, etc.). Characteristics to look for include discolored soil, abnormal odors, vegetative stress and signs of extensive filling or re-grading.

The final report should include the following:

1. Documentation to support the analysis, opinion and conclusions found in the report.

2. A description of all evidence of recognized environmental conditions on the property.

3. Photographs of the site.

4. An in-depth statement of the environmental professionals' findings and conclusions. It should also be noted that any conclusions generated from a Phase I ESA cannot reasonably confirm the presence or absence of potential environmental liabilities at the site, because discrete environmental media samples - surface soils, subsurface soils and groundwater - were not collected or analyzed.

5. The environmental professional's signature.

The following is a recommended outline for the contents of the final report:

1. Summary

2. Introduction

3. Site description

4. Historical records review

5. Site inspection information

6. Findings and conclusions

7. Signature of environmental professional

8. Optional appendices

A traditional Phase I ESA can cost between $1,000 and $3,000.

Phase II environmental testing
A Phase II environmental test is conducted when the client or prospective lender suspects a hazard exists on the property, or when the environmental professional suggests further testing after conducting a Phase I ESA. The information gathered in the Phase II investigation should identify, with some assurance, the presence or absence of a potential environmental hazard, or the approximate magnitude of an observed or suspected environmental hazard.

A Phase II investigation can cost between $5,000 and $15,000.

Phase III environmental remediation
A Phase III environmental remediation is required when current site conditions, past usage of the property or neighboring environmental hazards that were identified in the Phase II testing indicate a strong potential for on-site subsurface contamination of soils or groundwater. These remedial actions may include complete or partial removal of all contaminated media. Phase III activities also include managing and maintaining the successful, and continued, cleanup of the subject property.

A Phase III cleanup can cost $20,000 or more. The factors that affect all phases of the environmental assessment are as follows:

1. The size of the subject property;

2. The number of analytical samples required;

3. The past uses of the subject property; and

4. The time frame required for completion.


Environmental Assessment Association (EAA) www.iami.org/eaa.html

American Society of Testing Materials (ASTM) www.astm.org

Realty Locator www.realtylocator.com

Foreclosures Online www.4close.com

InRealty www.inrealty.com/index1.html

This article originally appeared in the 04/01/1999 issue of Environmental Protection.

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