PHASE 1 ENVIRONMENTAL SITE ASSESSMENTS (PHASE I ESAS) ARE MORE THAN A COMMODITY. LEARN THE TRUE VALUE OF A PHASE I.
BY: STEVE HENSHAW, PG, & CASEY MCFALL, CHMM
Buyers and sellers of property are familiar with the need to have Phase I Environmental Site Assessments (Phase I ESAs) prepared when there is a transaction or a refinancing of a property. To most stakeholders, including the buyer, seller, and lender, the Phase I ESA is part of the due diligence checklist, simply a report like a home inspection report, to identify potential environmental concerns with a property.
In the environmental consulting industry, Phase Is are considered “loss leaders,” meaning there is little to no profit to be made conducting the Phase I. Either the consulting company believes they must offer the service because their competitors offer it, or they believe that a certain percentage of Phase Is will require follow up environmental work because of the likelihood of contamination turned up during the investigation. Because the profit margin on a Phase I is at best slim, it is not uncommon for consultants to use lower paid and generally less experienced staff to conduct much of the Phase I. One side note, there is no project that carries with it more risk for the consulting firm than a Phase I, because if contamination is not identified during the Phase I, but is found later in time, the consultant and its liability provider could be on the hook for damages.
For the lending officer, their goal is to get the loan approved by the internal lending committee so they can get the sales commission. There is stiff competition between banks, and the cost of a Phase I can make a difference in a sale or not.
These dynamics set the stage for the Phase I becoming a commodity in the marketplace, and little thought is given to the value of the Phase I and, conversely, to the risk of having a Phase I completed that does not adhere to ASTM Standard E1527.
So, what is the true value of a Phase I ESA? What is often misunderstood or unknown to Buyers and Lenders is the actual liability protection afforded to potential purchasers by correctly completing a Phase I ESA. This liability protection is known as achieving bona fide prospective purchaser (BFPP) status through the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). People acquiring property, even with known contamination, can obtain BFPP protection if “all-appropriate inquiry” (i.e., completing a Phase I ESA) is completed prior to purchasing the property. The purchaser also must meet continuing obligations regarding any known or suspected contamination, including taking reasonable steps to stop any continuing release, preventing a future release of hazardous substances, ensuring property occupants are not being exposed to contamination, and there is not a threat of exposure to off-property persons. Obtaining BFPP protection can prove financially invaluable to the property owner or tenant, potentially saving hundreds of thousands or even millions in cleanup cost responsibility. Property owners without BFPP protection that did not contribute to or cause contamination at a property can still be held liable for cleanup costs by state and/or federal environmental regulators.
The Phase I ESA is a complex document that must be completed in its entirety to afford the prospective purchaser BFPP. Minor details that are often missed in Phase Is can result in a court rejecting a BFPP claim for a property owner. These minor details include but are not limited to not listing the exact purchasing entity as having reliance on the report, the prospective purchaser not completing the required questionnaire, and having an expired Phase I at the time of closing. This last point is especially important as we hear many parties state that they don’t need a Phase I ESA, as there was one previously completed for the property. The truth is that environmental standards change, and what may have been acceptable several years ago may constitute an environmental concern under today’s environmental regulations. Unless the exact prospective purchasing entity is listed as having reliance in the Phase I ESA and the report is under 180 days old, the Phase I is likely not valid for BFPP purposes. Additionally, it should be noted that the 180-day window for Phase I ESAs is from the date the first record is reviewed by the report preparer, not the date the report was issued.
Baseball great Leo Durocher once said that baseball is a game that many attend, but few understand. This can absolutely be applied to the world of environmental due diligence and Phase I ESAs. There are many environmental companies who claim to complete Phase I ESAs, but their product often will not afford the purchaser BFPP, even if it was completed prior to the property purchase. It’s the nuances that make the difference in the world of environmental due diligence. If you have questions or a need for environmental due diligence of Phase I ESA services, EnviroForensics would be happy to discuss your situation and, if appropriate, prepare a complete Phase I ESA that will provide liability protection and peace of mind for you and your business.
Disclaimer: Some states do not accept BFPP status as absolute liability protection. We are not lawyers and cannot give legal advice; as such, all Buyers should consult with qualified legal counsel when buying property.
Contact us with your questions about real estate due diligence.
As seen in Cleaner & Launderer
Steve Henshaw, PG, CEO
With 30+ years of experience, Stephen Henshaw holds professional registrations in numerous states. As Officer of EnviroForensics, Henshaw serves as a client manager and technical manager on complex projects involving contaminated and derelict properties, creative litigation, deceased land owners, tax liens, non-performing bank notes, resurrecting defunct companies, and cost recovery. Henshaw’s expertise includes a comprehensive understanding of past and current industry and waste handling practices and the fate and transport of chlorinated solvents in soil and groundwater. He has served as a testifying expert for plaintiffs and defendants on high-profile cases involving causation and timing of releases, contaminant dispersion, allocation, damages, past costs, and closure estimates. He has a strong knowledge of state and federal regulations, insurance law, RCRA, and CERCLA. He has managed several hundred projects, including landfills, solvent and petroleum refineries, foundries, metal plating shops, food processors, dry cleaners, wood treating facilities, chemical distribution facilities, aerospace manufacturing facilities, and transporters and provides strategy instrumental in funding projects and moving them to closure.
Casey McFall, CHMM, Director of Real Estate Due Diligence
Casey McFall is the Director of Commercial Real Estate Services and a Certified Hazardous Materials Manager with 15+ years of experience as an environmental consultant. He has managed numerous petroleum and chlorinated solvent projects throughout various stages of investigation, remediation, and closure. His professional experience includes all areas of project management, due diligence, reporting, and regulatory negotiation. He has experience managing projects in Alaska, California, Georgia, Indiana, Kentucky, Ohio, South Carolina, Wisconsin, and Washington. Casey also has experience acting as an environmental liaison for municipalities, offering expert advice regarding environmental issues and providing risk communication to stakeholders and the community by explaining complex environmental issues in a concise, understandable way.