Environmental Site Assessments: Essentials for Real Estate Investors

Buying or selling a commercial or investment property is a process, sometimes an involved one. One of the more complex—and least understood—aspects of this process is the Phase I Environmental Site Assessment (ESA). We asked environmental attorney James J. Periconi to explain some of the essentials of Phase I ESAs and why it is often advantageous to incorporate them into some important real estate transactions.

What, exactly, is a Phase I Environmental Site Assessment (ESA)?

A Phase I Environmental Site Assessment (ESA) is a process (and a report) that provides the essential component of due diligence that those planning to acquire commercial or industrial properties must undertake in order to evaluate the environmental risk that goes with that acquisition.

The Phase I ESA consists of everything necessary―”all appropriate inquiries”―into past uses of the property, consistent with good and customary commercial practice. This requires:

Data review of the property history
Site walk-through
Interviews with the current or past property manager

The goal is to determine whether Recognized Environmental Conditions(RECs) are present, reflecting actual or potential releases of hazardous materials at the property. The data review includes a thorough look at the environmental history of properties in the surrounding area, as well as of the property to be acquired, since hazardous materials don’t stop at property lines. Phase I ESAs are non-intrusive; no soil, groundwater, soil vapor or indoor air samples are taken.

Are there other types of Environmental Site Assessment?

There are also Phase II Environmental Site Assessments/Investigations, which involve sampling and analyzing soil, groundwater, soil vapor and indoor air quality, and sometimes geophysical tests to confirm that suspected underground storage tanks are still there. Phase II ESAs are based on the identification of RECs in the Phase I ESA.

What kind of properties should undergo a Phase I ESA?

Any property with a current or past commercial, industrial or agricultural use should undergo a Phase I ESA in the acquisition process.

What other reasons (besides identifying past uses of the property that might have caused a release of hazardous materials) are there to perform a Phase I ESA?

Phase I ESAs provide legal “inoculation” from liability under federal law. This “bona fide prospective purchaser” protection exempts buyers from potential liability related to prior contamination they had nothing to do with.

What potential problems are most typically uncovered by a Phase I ESA?

That depends on the site’s previous uses. For example, there could be underground fuel oil or other petroleum (gasoline or diesel) storage tanks. If the property is or was a gas station, it could have a couple of generations of tanks on top of each other. As another example, any present or past dry cleaner operation will likely have ground contamination from improperly disposed of waste cleaning fluid. And then there are those kinds of facilities that by their nature generated hazardous wastes, which virtually always spilled onto the floor―like electroplating facilities or computer manufacturers.

How often should a Phase I ESA be performed and who is responsible for it?

Phase I ESAs go stale in six months, so a new one must be done any time a property with a commercial or industrial past is about to change hands. Usually purchasers do the assessment, since they stand to gain or lose the most. Often they need to borrow money to buy the property, and the bank demands that the would-be buyer/borrower provide a Phase I ESA. Sellers also have a stake in the Phase I ESA process, especially if its results identify RECs that may suggest a Phase II ESA is needed.

How does a Phase I ESA affect the timing of a transaction?

I usually advise clients and their attorneys to allow time for the Phase I ESA to be completed and analyzed, and for the Phase II ESA to be performed when there’s a hint that it might be needed. Ideally, the Phase II ESA would be complete before closing, but that doesn’t always happen, so the contract should provide for many different possible outcomes. Other issues that can impact the timeline include the size of the property and the particulars of the property’s commercial past (see above, e.g., a dry cleaners). Negotiation will probably take longer when the parties become concerned about remediation costs.

What usually happens if a Phase I ESA uncovers a potential issue?

That varies with the issue. Some contaminations―like asbestos―are often best left in place, so long as they are contained by an appropriate protective barrier. Others―such as remaining underground storage tanks―typically indicate the need for a Phase II ESA so that the parties can be fully informed if there is a significant problem that should impact both the price of the property and their respective obligations.

What’s the role of a broker or transactional real estate attorney?

A responsible broker or transactional real estate attorney should, early on in a potential transaction, recommend a Phase I ESA for any commercial or industrial property, whether or not anyone involved has a specific reason to think one is needed, to ensure that the buyer is exempt from potential liability.

Why would someone need to hire an attorney who specializes in environmental issues?

We can help identify Phase I ESA consultants who will perform the assessment competently; not every company can do this as well as they claim. We are also trained to (1) help draft the contract of sale to reflect the parties’ actual business agreements about who bears any costs of liability for environmental investigation and cleanup; and (2) ensure the Phase I ESA properly identifies those RECs, which then sets the stage for a potential Phase II ESA to identify actual contamination. Finally, we represent the parties responsible for reporting findings of contamination to government agencies and seeking government approvals that may be needed to get a clean bill of health for the property.

How should a buyer use a Phase I ESA in deciding whether to proceed with purchasing the property?

Much depends upon the buyer’s appetite for the risk that goes with buying a potentially contaminated property. Remember, the Phase I ESA doesn’t say for sure that the property has a real problem; rather, it points the way toward a Phase II ESA, which will confirm a problem. Even then, the Phase II ESA won’t tell you the full scope of it, but experienced environmental attorneys and environmental consultants can give you informed estimates of the costs of fixing the problem.

James J. Periconi, Esq., is Managing Principal of Periconi, LLC, a boutique environmental law firm in Manhattan. The firm’s practice focuses on assisting businesses—including real estate developers and investors—to reduce the risks associated with buying and selling contaminated properties or businesses. Members of the firm are deeply familiar with the ESA process and have initiated and reviewed hundreds of Phase I ESAs and more than 100 Phase II ESAs. The firm works hard to put our clients’ minds at ease when dealing with recognized environmental conditions (RECs) and help shape the purchase and sale agreement to effect the business transaction as the parties intend, and thereby avoid litigation.

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