Imagine you just purchased a 20-acre property in a prime location along a major thoroughfare. The site is an ideal location for new mixed-use development. Unfortunately, you didn’t know that for a twenty-year period starting in the 1960s, a dry cleaner was present on the property. The dry cleaner had poor housekeeping practices and often spilled dry cleaning solvents during regular operation. That solvent, tetrachloroethene (PCE), is very slow to break down, so it builds up in the soil. It is carcinogenic and regulated by local environmental agencies and the EPA.
Unfortunately, before you can build on the property, it needs to be cleaned up to regulatory standards. As the current property owner, you may be financially and legally liable for the process.
So, how do you prevent this from happening? The process starts with a Phase I Environmental Site Assessment (ESA). A Phase I ESA reviews historical uses and current conditions on the property to identify any potential environmental concerns that may have impacted the soil, soil gas, or groundwater and could pose a threat to human health or the environment.
In the world of Phase I ESA’s these environmental concerns are known as Recognized Environmental Conditions (RECs). In the case above, a Phase I ESA would identify the historical presence of a dry cleaner on the property as a REC.
Do You Need a Phase I ESA?
In many cases, a Phase I ESA is required for financing a commercial property transaction. Often banks and lending institutions will not approve a loan unless an environmental professional has assessed the property with an official Phase I ESA report outlining the findings. For the lender, a Phase I ESA helps reduce risk in the transaction (and therefore the loan they are providing) and gives more information to accurately determine the property’s value.
However, even if a Phase I ESA is not required, you should still have one completed for any commercial property transaction. It is a relatively cheap and quick process that can identify issues potentially costing millions of dollars.
That being said, there are a few scenarios where having a Phase I ESA completed is much more crucial, and in some cases, might be the driving factor in an acquisition. These types of properties include:
- Commercial and industrial properties known to have had hazardous compounds onsite (automotive repair, dry cleaning, electroplating, etc.)
- Properties adjacent to a site that has used hazardous compounds
- Properties known to have had, or currently have, underground storage tanks (USTs)
- Properties used for oil or gas exploration/production
- Undeveloped property with a history of long-term agricultural use
- Properties with known environmental liens
The role of a Phase I ESA is ultimately to reduce your risk. It will typically be completed during a transaction’s due diligence period and can be used to satisfy the requirements of CERCLA’s (Comprehensive Environmental Response, Compensation, and Liability Act) innocent landowner defense. This helps mitigate liability for contamination on a property before an acquisition.
Environmental Concerns, RECs, and Contaminants
Environmental concerns can take many forms, but ultimately, they are summed up in the catch-all definition for a REC:
“The presence or likely presence of any hazardous substances or petroleum products in, on, or at a property: (1) due to any release to the environment; (2) under conditions indicative of a release to the environment; or (3) under conditions that pose a material threat of a future release to the environment.”
In short, an environmental concern is a past release or potential for a future release of contaminants on a property.
The potential contaminants on a property are associated with the site’s use. In most cases, they are substances commonly used in the property’s operations. A few of the most common include:
- Volatile Organic Compounds (VOCs) – VOCs are a wide range of organic compounds found in thousands of products and are some of the most common environmental contaminants. A few of the most common compounds that contain VOCs are solvents, paints, pharmaceuticals, refrigerants, hydraulic fluid, and petroleum fuels.
- Metals – Metals naturally exist in the environment, but elevated concentrations of some metals can negatively impact the environment and humans. Common activities leading to metal contamination include electroplating, agriculture, mining, and photo processing.
- Petroleum – Petroleum is not only directly harmful to living organisms, but it often also contains VOCs. For example, gasoline contains the BTEX VOCs (benzene, toluene, ethylbenzene, and xylenes). Common sources of petroleum contamination include underground storage tanks (USTs), gas stations, oil/gas exploration, and vehicle maintenance facilities.
While these are a few of the most regularly found contaminants, it is by no means an exhaustive list. The EPA and local environmental agencies dictate the specific contaminants regulated for a region.
What Research is Included in a Phase I ESA?
A Phase I ESA has several distinct steps that create an overview of the property’s historical uses and current condition. These steps follow the accepted Phase I ESA protocol outlined in the American Society for Testing Materials (ASTM) Standard Practice requirements for Phase I Environmental Site Assessments (E1527-21) and Environmental Protection.
Review of Available Property Records and Prior Environmental Reports
This typically includes historical aerial photographs, historical topographic maps, fire insurance maps, and historical city directories. In many cases, a combination of these records will be available from the early 20th century through present times. These records often provide some of the best insight into the past uses of the subject property and adjacent properties.
Review of Regulatory Files and Records
Government agencies maintain public records on a variety of information. Important agency records to review include building departments, fire departments, underground storage tank (UST) lists, past environmental cleanups, and storage/disposal of hazardous waste.
Physical Inspection of the Property and Surrounding Area
A site visit provides insight into the current condition of the subject property and adjacent properties. This allows the environmental professional to assess the site for any activities that could be an environmental concern or indicate an imminent release.
Interview with Property Owners and Other Key Property Managers
Interviews with people familiar with the property provide insight into what types of operations were there, how they were run, and what compounds were used.
After all of the research and a site visit is completed, a Phase I ESA report is written. The report summarizes any RECs identified and their potential impacts.
How Long Does It Take to Complete a Phase I ESA?
A Phase I ESA typically take 2 to 3 weeks to complete. This timeframe is dictated by which government records need to be reviewed and the amount of information available. For example, a 20-acre property with 50 years of industrial use and several past environmental reports will take longer than a 5-acre property with an office building.
How Much Does a Phase I ESA Cost?
The average cost of a Phase I ESA typically ranges from $1,750 to $3,000. Again, like with report turnaround time, the cost is a function of the specifics of the property. Ultimately, the more time a Phase I ESA takes to complete, the higher the price.
A few factors that we consider when creating a cost estimate for a Phase I ESA are:
- Property location
- Previous environmental history
- Site location (how much travel time is required)
- Property size and current use
- Number of surrounding sites listed in government databases
- Quantity of records available for the property and surrounding sites
What Happens if a REC is Found?
Don’t worry! Just because a REC was found on the property doesn’t mean there is a problem. A REC means that there could potentially be contamination.
If a REC is identified, the next step is a Phase II Investigation. A Phase II consists of subsurface sampling. Depending on the contaminant of concern, this may include soil, soil gas, or groundwater. Ultimately, the sampling data, combined with the Phase I ESA research, is used to make an informed decision about the presence of contamination, what that means for liability, and potential next steps for the property.
Aegis Environmental – A Trusted Consultant
We believe that you should always have a Phase I ESA completed in a commercial property transaction, whether required by your lender or not. It is an easy way to mitigate the risk of a costly cleanup and protect your investment.
Furthermore, we know that environmental reporting and regulation can be complicated. That is why you need experienced environmental professionals who stay on top of changing regulations and new research in the field. Knowing that you can trust your consultants is paramount.
Here at Aegis Environmental, we have been providing our clients with environmental consulting services for over 20 years and are proud of the reputation we have built. We are committed to providing high-quality environmental services that support your needs.
It’s also important to note that although we are based out of Greenwood, IN, we cover a wide region including the following states:
And while we work throughout Indiana, we do a considerable amount of work in Northern Indiana in these cities:
If you think you might need a Phase I ESA or want to learn more about the Phase I ESA process, we are happy to help. Contact us to get in touch with our staff of qualified environmental professionals.