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:
– 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
-Oil & gas maps
Geology & Hydrogeology
-Ground water flow
-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:
- 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