What is a Phase I Environmental Site Assessment Anyway?

The Phase I Environmental Site Assessment (ESA) is a report used to evaluate the environmental liability of a property.  A Phase I ESA is often required by lenders during the financing of commercial real estate. 

The generally accepted standard for conducting a Phase I ESA is the American Society of Testing Materials (ASTM) 1527-2005 Standard, although specific clients and agencies may have additional requirements and standards. The ASTM Standard is based on the Environmental Protection Agency’s (EPA) All Appropriate Inquiry (AAI) Rule, which provides specific guidelines for a Phase I ESA to meet the requirements of a law called CERCLA (Comprehensive Environmental Response, Compensation and Liability Act, commonly known as the Superfund law). Ultimately, an innocent land owner, contiguous property owner, or a bona fide prospective purchaser that wants to meet CERCLA’s requirements must conduct ALL Appropriate Inquiry into the property’s use, history and potential for contamination to obtain protection from potential environmental liability. The AAI Final Rule went into effect on November 1, 2006.

Phase I Environmental Site Assessments are done by (or under the supervision of) Environmental Professionals who meet the requirements of the EPA’s AAI rule. Essentially, an environmental professional must possess sufficient knowledge and experience to exercise professional judgment, appropriately evaluate risks and form conclusions regarding conditions indicative of releases or threatened releases at a property.

An environmental consultant conducting a Phase I ESA is required to inspect the property, conduct interviews about the property, review historical records of the property and research records available at government agencies. Their information sources may include the following:

 Site Visit

– Inspection of site and observation of surrounding properties

– Note presence of hazardous materials and potential sources of contamination

– Look for evidence of past uses of the property

Historical Research    

-Aerial photos

-City directories

-Building permits

-Topographical maps

-Oil & gas maps

-Title information

Geology & Hydrogeology

-Soil type

-Ground water flow

Regulatory Research

-Fire department and other local angencies

-State & federal environmental agencies

 Interviews & Document Review

– Tenants, owners and property managers

– State & local regulators

– Review provided reports

   This information is evaluated and an opinion is made by the environmental consultant as to whether past or present activities may have caused contamination of the soil or groundwater at the subject property.  If the Phase I Environmental uncovers arecognized environmental condition (REC), the environmental consultant will usually recommend a Phase II ESA, which involves invasive soil or groundwater testing.

Variations or additional requirements to the ASTM 1527-2005 Standard for Phase I ESA maybe necessary for the following agencies and situations:

•          Foreclosure
•          HUD Multifamily Accelerated Processing (MAP)
•          Fannie Mae
•          Freddie Mac
•          SBA Lenders
•          Large Tracts (such as forestland, agricultural, or rural property)
•          USDA Rural Development
•          Cell Tower Developers

 While the Phase I Environmental Report is clearly the standard for environmental due diligence, many lenders have come to rely on alternatives reports for low risk assets or low dollar transactions. Some of the more frequently used limited, yet customizable, products are:

– Environmental Transaction Screen (ETS) — meets ASTM 1528-06 Standard Practice for Limited Environmental Due Diligence: Transaction Screen Process.

– Limited Environmental Site Assessment (LESA) – between Phase I and ETS.

– Environmental Historical Report —  investigates whether a site has always been low risk

– Environmental Database — search of government records of spills or environmentally sensitive operations at or near the property

What is a Property Condition Assessment Anyway?

Chances are if you have been in the industry awhile, Property Condition Assessments (PCAs), Property Condition Reports (PCRs), or Commercial Building Inspections, are an everyday procedure. If you had to explain what they were to someone outside of real estate or engineering, how would you break it down in common terms?

 A real estate investor wants to obtain financing for a commercial building from a lender. Said lender wants to know exactly what the condition of the building is since this can impact the financial performance of the asset as a whole. Both the real estate investor and lender want the reassurance regarding their investment that a due diligence tool such as the Property Condition Report provides.  Different lenders can have varying requirements regarding a PCR, but the industry standard is the ASTM E2018 Guide for Property Condition Assessments; Baseline Property Conition Assessment Process.  This is a walk through survey of the property by an architect, engineer, or a commercial building inspector who prepares a narrative report (this is the Property Condition Assessment, Property Condition report, or Commercial Building Inspection).  Evaluations of systems such as HVAC, plumbing, electrical, and fire suppression as well as the structure, foundation, roof, and other building characteristics are included in the report.

What is in a Property Condition Report

The PCA discusses each building system, and will describe all of the significant concerns or defects that were found during the inspection.   Each report will include a table of Immediate Repairs and a table of Replacement Reserves over the desired reserve period.   Significant concerns are generally considered those that are costly or present safety issues.  Logically, safety concerns usually show up in the Immediate Repairs Table along with failing or damaged building systems and maintenance issues that have been deferred. Capital expenses that will be required in the longer term, such as HVAC system replacements, will be in the Replacement Reserve Table.  The estimated cost for repairs and replacements are included in the tables.

The details or extent of a report can vary depending on who is using the information from the report and how.  Familiar entities that have specific requirements and even separate titles regarding a requested PCR are: Standard & Poor’s, Freddie Mac, Fannie Mae (called a Physical Needs Assessment), and Housing and Urban Development (HUD)/ Federal Housing Authorities(FHA) (called a  Project Capital Need Assessment).

A Green Property Condition Assessment  is a version of the PCA that includes assessment of a building’s energy and / or water consumption and efficiency, and possibly other sustainability issues with the property. The “green” element can take many forms but is often an Energy Audit in conjunction with the PCA, or possibly an LEED- style checklist.