Why are Phase 1 Environmental Site Assessments (ESA) Important?
When I think about the property acquisition or real estate development process, I generally break down all the component steps into one of two buckets.
Some steps are apparent and naturally familiar to people – think engineering and architectural work for development. Or an inspection if you're pursuing an acquisition.
Other steps, however, are less intuitive but no less critical. And they can have a material impact on the real estate due diligence required to investigate and understand a property thoroughly.
A phase 1 environmental site assessment often falls into the latter category. This article will cover everything you need to know about environmental assessments, why they're important, and how they can impact your future projects.
What is a phase 1 environmental site assessment?
A phase 1 ESA is an investigation into the environmental conditions of a subject property. The environmental assessment would determine the current, likely, or historical presence of any recognized environmental conditions (RECs) – petroleum products or other hazardous substances.
Phase 1 ESAs are usually ordered by the property buyer but protect both parties in the transaction. And in many cases, a lender will require an assessment before financing a project.
If issues are detected during an assessment, it can lead to problems with liability for the property owner and the lender. So typically, before a transaction is closed, further examinations are necessary and remedial action may be required.
It's important to note that environmental assessments are applicable and often completed for various real estate product types, including raw and vacant land, industrial and flex buildings, apartments, and other commercial properties.
What does a phase 1 ESA cover?
Investigating all the environmental conditions that may impact a subject property is a broad scope, so a lot of information needs to be aggregated and interpreted.
First, the environmental consultant will do some background research on the property to determine the site's current and past uses and the uses of nearby and neighboring properties. The relevant administrative data will give examiners some insight into whether specific aspects of a property need to be investigated more thoroughly.
It's not uncommon that neighboring and adjacent properties can negatively impact a subject property, so investigators need to collect background data before their in-person site visit.
Additionally, the current and past subject property owners, occupants and tenants, and the buyer may also be interviewed. Through the interviews, an examiner may uncover information not otherwise available publicly.
Once the admin data is assembled, the phase 1 ESA assessor will conduct a site visit to observe the subject property's and adjacent properties' current and past conditions. This is meant to confirm the background information already collected. The examiner will take pictures and document anything noteworthy.
After visiting the site, there is a review of local, state, and federal regulatory databases to determine the presence of any underground storage tanks (USTs), above-ground storage tanks (ASTs), or the storage and disposal of any hazardous wastes on the site. Any tanks on a site often require a phase II environmental assessment to determine further the possibility of hazardous substances seeping into the ground.
A review of historical aerial photographs, fire insurance maps, topographical maps, and historical city directories is also required. State and local records from agencies like the building or health department may also be investigated.
Once all the research has been compiled, it’s thoroughly evaluated by an environmental consultant to identify any potential environmental risk that may impact the property. If known or suspected contaminations are present, further investigations are often required.
The data and findings are then assembled into a report and presented to the entity that ordered the phase 1 ESA.
Phase 1 ESA costs and timeline
Depending on the property type and the history and extent of development, a phase 1 ESA may range in time and cost.
Generally, a property with little history of development is easier to investigate and will cost $1,000 to $2,000 for the report and take 2-4 weeks to complete.
A property requiring more extensive investigative work may cost $2,000 to $3,000 for the report and could take up to 4-6 weeks to complete.
A phase II environmental site assessment and follow-on site remediation can cost tens or hundreds of thousands of dollars if contamination is identified.
Why is a phase 1 ESA critical?
As a rule of thumb, an environmental site assessment should be conducted any time you purchase a property. Download a copy of our free site selection and land acquisition due diligence checklist if you're unsure what real estate due diligence tasks are important for your property purchase.
But aside from it simply being prudent to conduct a phase 1 ESA before buying a property, there are a couple of reasons why they're essential.
First is the issue of liability. In 1980, the Comprehensive Environmental Response, Compensation & Liability Act (CERCLA) was created to combat pollution after several high-profile contamination cases led to adverse community health issues. The law intended to ensure that the polluting party would be held responsible for any costs and cleanup associated with any environmental damage.
The law also dictated that property buyers have some responsibility in combatting pollution as well – purchasers must participate in thoroughly investigating property for environmental issues. A phase 1 ESA reduces much of the environmental liability buyers are exposed to as part of the real estate buying process.
Second is an issue of financing. Most banks and lending institutions are expert risk managers. And before a bank finances a project, they'll often require a phase 1 environmental site assessment to be completed.
Think about it. If the buyer defaults on the loan and the bank seizes the property, they don't want to be stuck with a piece of real estate encumbered by environmental issues.
Lastly is the innocent landowner defense. The innocent landowner defense allows owners of contaminated property to avoid CERCLA liability, assuming the contamination happened before property acquisition and the buyer performed "all appropriate inquiries."
If a buyer performed an ESA before acquiring property and didn't know about any prior contamination, they would likely be protected from liability for required environmental cleanup.
What to do after you receive an environmental site assessment report?
Once the phase 1 is complete and you receive the report, you’ll need to decipher it to determine what actions, if any, are recommended to address concerns that may have popped up during the examination.
The identification of a REC will likely trigger the need for a phase II environmental assessment to collect and test soils for the presence of contamination. Additionally, the presence of an environmental condition that has already been remediated or a historical environmental condition (HREC) may also trigger the need for a phase II ESA.
The environmental professional would likely recommend no further action if no evidence of any conditions were found.
Most lenders will want a copy of the report to confirm the findings and recommendations before proceeding with a project.
A real estate consultant can help manage risk during land development
A phase 1 environmental site assessment is a fundamental step in the real estate due diligence process - often a requirement by any lender or financier, but important to reducing your liability, nonetheless.
But at what stage during the buying process should an ESA be ordered? And how do you sequence it among your other real estate due diligence activities?
Due diligence is all about risk management – there is an art to methodically investigating a property while limiting your out-of-pocket capital exposure.
But it's hardly straightforward, especially as the project gets more complicated and the land entitlement process becomes more and more arduous.
That’s one of the ways Marsh & Partners can add value to your project, ultimately helping you maximize the value of your investment, reduce risk, and shorten your project lifecycle.
Check out our consulting services for more information on how a real estate advisor may be a good fit.