What is a Phase I Environmental Site Assessment?
A Phase I Environmental Site Assessment (ESA) is an important risk reduction tool for any property transaction. Most financial institutions require completion of environmental due diligence as part of their lending practices. However, both a prospective purchaser and, in some cases, the prospective seller should conduct an ESA to protect their respective interests even when conducting a cash purchase or utilizing a non-traditional funding source. In addition, a tenant and landlord can utilize a Phase I ESA and environmental due diligence to reduce respective risks when entering a lease agreement. To fully understand the benefits of a full-scale Phase I Environmental Site Assessment and the protections it provides, a short introduction to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), the “Innocent Landowner” protections and “All Appropriate Inquiries” is necessary.
CERCLA, “All Appropriate Inquiries,” and the Innocent Landowner Defense
The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) was enacted by Congress in 1980. The law created the “Superfund” program, but most importantly it created a methodology for the United States Environmental Protection Agency to levy taxes and fines to assist in the assessment and subsequent cleanup and remediation of environmental spills and releases.
In addition to providing the methodology to hold polluters responsible, CERCLA also provides a method to protect innocent landowners who did not contribute to environmental contamination. A landowner that conducts “All Appropriate Inquiries (AAI)” under the CERCLA rule can obtain certain liability protections. AAI is a process of evaluating environmental conditions at a property and a method for assessing potential liability for contamination.
What Counts as “All Appropriate Inquiries?”
The Federal Law 40 CFR §312.21 sets forth the requirements of AAI, and requires no specific format, structure, or length of the resulting written report. The US EPA recommends following the American Society of Testing and Materials (ASTM) E1527-13, Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process as the guideline to follow when conducting AAI. The US EPA requires the following four documentation requirements:
An opinion as to whether the inquiry identified conditions indicative of a release or threatened release of hazardous substances on, at, or in the subject property;
An identification of data gaps;
Qualifications and signature of the environmental professionals that conduct the inquiry; and
The opinion of the environmental professional as to whether additional appropriate investigations are necessary.
What does a typical Phase I Environmental Site Assessment Report Include?
The Phase I ESA standard is set forth by ASTM E1527-13. The standard generally requires the following be included in a report:
Introduction outlining the scope of work, assumptions, etc.;
Site Description including the current property uses, layout, geology, adjacent property descriptions;
User-Provided Information involving title records, previous reports, purchase/sale price (if applicable);
Agency Records Review for the subject property and immediately adjoining property, including land-use restrictions and liens and documentation for nearby release cases;
Environmental Records Radius Database Review pulling records from publically available databases up to 1 mile from and including the subject property;
Historical Records Review to determine use in 5-year intervals back to 1940 or first developed use of the property, whichever is earlier;
Site Reconnaissance of the entire property and the surrounding area;
Interviews with property owners, tenants, past owners, and neighbors (if necessary);
Findings identifying any recognized environmental conditions, controlled recognized environmental conditions, historical recognized environmental conditions, and other environmental considerations or business risks;
Opinion of the Environmental Professional as to whether the findings may have resulted in a release to the environment;
Data Gaps that may have impacted the environmental professional’s ability to identify environmental releases or conditions;
Conclusions confirming that the ASTM standard has been followed, with the exception of limitations discussed in the report;
References including all resources consulted during the assessment;
Signatures/Qualifications of the environmental professional(s) that completed the report; and
Appendices, typically a map, photographs, copies of the documents consulted, and other applicable records.
Other Observations on mold, radon, asbestos-containing materials, methane, lead-based paint, and drinking water quality may be included in the report; however, these items are not part of the Phase I ESA E1527-13 standard.
When Do I Need a Phase I ESA?
A Phase I ESA is recommended for any property transaction or financing decision where an entity may incur environmental risk. The Phase I ESA not only protects you from issues originating at the subject property, it identifies potential concerns in the immediate vicinity and general surrounding area that may impact the use of your property. If there are no previous reports or documentation confirming that a property has been undeveloped or used for extremely low-risk purposes back to first development, a Phase I ESA is recommended to provide that benchmark before purchasing or selling contracts are completed. If a property is low-risk, an alternative Environmental Transaction Screen (ETS, ASTM E1528-14) may be conducted for personal use; however, the ETS or any other Limited Environmental Site Assessments (LESAs) do not fulfill the requirements of “All Appropriate Inquiries,” and do not provide protection under CERCLA.
Choose a Qualified Environmental Professional
Utilizing an environmental professional with long-term experience in research reduces the chance of data gaps in your report that can hinder your liability protections. Even the most benign-looking property can have a hidden history that can impact the value, future use, and financial benefit of an investment. A small investment into a quality Phase I ESA upfront can spare environmental costs that reach into the $100,000s after a deal is closed. Protect yourself with a Phase I ESA, and sleep better at night knowing that you have the due diligence that you require heading into a deal.
