Due Diligence 101: Phase 1 Environmental Site Assessments
What is a Phase I Environmental Site Assessment?
A Phase what? Environmental who? Nowadays, most people’s reaction to a “what is” question is “Google it!” (or “Bing it!” - I don’t discriminate). The problem is, if you are searching this question, the answers you find will likely leave you more confused than when you started…unless of course, your search landed you here. In which case, high-five Google! (or Bing!)
Let’s paint a picture.
Imagine a property that is involved in a real estate transaction. If you were buying that property or financing that property for the buyer or owner, you’d probably want to know the risks and potential risks associated with that property. Well, a Phase I – said as “Phase One”, but written “Phase I” -- is the tool that will give you the knowledge you seek, from an environmental perspective.
Simply stated, a Phase I evaluates current and historic activities at a property and its surrounding properties to determine if there is a potential for hazardous materials and/or petroleum products to contaminate the soil or groundwater. A Phase I will also indicate if there is a potential for vapor encroachment at the property. This is when gases from contaminated soil or groundwater have the potential to reach the surface. Such a condition has the potential to cause a health risk.
Why and how do people conduct a Phase I?
A Phase I is typically conducted as a part of the due diligence process for a real estate transaction. From a lender perspective, a Phase I identifies any risks that could devalue the property or impact buyer’s or owner’s finances. From a buyer perspective, a Phase I limits liability by identifying any environmental concerns with the property prior to purchase. The driver for this part of the due diligence process is rooted in the “Superfund” Act of 1980, and enables a purchaser/lender to satisfy one of the requirements to qualify for one of the Landowner Liability Protections; that is, the practice that constitutes all appropriate inquiries into the previous ownership and uses of the property consistent with good commercial and customary practice.
So, you order up your Phase I. What happens next?
Let’s add another layer to our painting: the assessment itself. Actually conducting a Phase I Environmental Site Assessment consists of two main parts: the site visit, which provides insight into current conditions, and research, which provides insight into historical conditions.
First, a qualified field assessor will conduct the site visit, where they will:
- Assess on-site operations and conditions
- Evaluate the adjacent and nearby properties
- Visit local agencies to obtain information (e.g. the building department, fire department, health department, etc.)
- Conduct interviews with owners, occupants, and any property users
Next, research is completed. Research consists of:
- Reviewing historical aerial photographs, fire insurance maps, topographic maps, city directories, and any other available previous investigations
- Reviewing any information on file with regulatory agencies, if applicable
Findings from the site visit and research are combined to evaluate the current and historic activities at your property and surrounding properties. It is then determined if there is a potential for hazardous materials to have polluted soil or groundwater, or to have created a potential for vapor encroachment.
What happens after the Phase I is completed?
While all parties involved in the transaction are likely hoping that no potential environmental hazards are identified with the property, the reality is that there are numerous current and historical “red flag” property uses. Some of the more common examples include: gas stations, dry cleaners, rail yards, military facilities, and any number of industrial or manufacturing operations. For the most part, any significant amounts of hazardous materials and/or petroleum products used on site could be dangerous, especially if they are stored or buried underground.
If it is determined that one of these (or another) hazardous material may have impacted your site in a harmful way, it is certainly not time to crumple up your paper and throw away your painting-- it is just the end of the Phase I process. The next steps will vary based on the specific issues identified, but typical scenarios are to consult with regulatory oversight agency; collect soil, groundwater, and/or vapor samples; and/or conduct a ground-penetrating radar survey (which would identify underground storage tanks).
Now that our painting is complete, it’s easy to see that a Phase I Environmental Site Assessment is a vitally important part of the real estate due diligence process. What is equally important is the integrity and quality of the consultant conducting the Phase I. There are published industry standards, called ASTM standards, as well as industry best practices that should be followed while conducting a Phase I, so be sure that you do your due diligence in making that selection. Protect yourself and/or your company from risk by having your Due Diligence Provider conduct a Phase I Environmental Site Assessment.