When is a Phase I Environmental Site Assessment (ESA) necessary?
A Phase I ESA should be conducted prior to commercial or industrial property transactions. The Phase I ESA is typically requested by the purchaser of the property to ensure that the environmental condition of the property is evaluated prior to the purchaser assuming liability. Lenders can also request a Phase I ESA to ensure that a property doesn’t carry any environmental liabilities prior to loan issuance. A seller or lessee can also request that a Phase I ESA be completed as it can provide evidence that demonstrates the current owner/occupant was a responsible environmental steward during its ownership/occupancy of the property.
Why should a Phase I Environmental Site Assessment (ESA) be conducted?
The most common reason that a purchaser would want to conduct a Phase I ESA is to qualify for Landowner Liability Protections (LLPs) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). These protections can come in the form of the Innocent Landowner (ILO), Bonafide Prospective Purchaser (BFPP), or Contiguous Property Owner (CPO):
- The ILO defense protects entities from liability that acquire property and had no knowledge of any contamination on the property at the time of purchase.
- The BFPP provision protects entities from liability for acquiring a property with preexisting contamination.
- The CPO provision protects properties that have or may have been contaminated by neighboring property.
The LLPs are available to purchasers as long as they did not cause, contribute, or consent to any contamination on the property, had no affiliation with the responsible party if contamination is present, and conducted All Appropriate Inquiries (AAI) at the time of property acquisition. AAI is the process of evaluating a property’s environmental conditions and assessing potential liability for any contamination. AAI is the main requirement that a purchaser would need to fulfill, and the industry standard for satisfying AAI is to conduct a Phase I ESA.
The Phase I ESA can be used to identify any potential environmental issues, liability, or risks that would be assumed by the purchaser. The primary function of the Phase I ESA is to identify Recognized Environmental Conditions (RECs) which are the presence, likely presence, or material threat of future release of petroleum products or hazardous substances. Depending on the severity of possible RECs, a facility could be opened up to liabilities in the hundreds of thousands of dollars. Conducting the Phase I ESA ensures that the purchaser is not hit with any surprises after the transaction, and it provides knowledge that can be utilized to negotiate the purchase price. Environmental liabilities can be significant and can more than warrant further negotiation for transactions.
The Phase I ESA can also reveal any Activity and Use Limitations (AULs) or Environmental Liens against property as well. AULs are legal restrictions placed on a property due to the present contamination. This can significantly impact how a property can be developed and can eliminate some possibilities entirely. Environmental Liens are legal claims placed on a property due to contamination that holds the owner responsible for cleanup costs. Depending on the severity of the lien, some purchasers may walk away from a transaction entirely.
If a lessee or occupant is looking to no longer use a property, the Phase I ESA is also one of the primary methods to prove to a lessor or lender that it has not caused any environmental issues at the property.
Is there benefit to an Environmental Compliance Audit prior to a Phase I Environmental Site Assessment (ESA)?
Whether preparing for purchase, ending a lease, or financing, it is in the best interest of the occupant of the property to conduct an Environmental Compliance Audit prior to conducting a Phase I ESA to gauge the current environmental condition of the property. An Environmental Compliance Audit will look at the property in much greater detail than the Phase I ESA because it will include a review of all facility permits, programs, and records, an evaluation of whether the facility is complying with state and federal regulations, and a thorough walkaround inspection. An Environmental Compliance Audit will reveal any possible environmental issues that would come during a Phase I ESA and more. This preparation is imperative as it can allow a facility to address any possible environmental issues prior to them being found and documented in a Phase I ESA Report.
If your facility is considering the purchase, sale, lease, or financing of commercial or industrial property, you should be proactive by conducting an Environmental Compliance Audit to examine the environmental condition of your facility. After addressing any possible environmental issues, a Phase I ESA should be conducted early in the transaction process to allow for proper price negotiation, discovery of AULs or liens, and to take advantage of LLPs. If you need assistance with ensuring that you take advantage of the protections available to you, please contact CTI at (770) 263-6330 to ask about conducting a Phase I ESA.