Thinking about selling or buying a commercial property? There are many things to consider when planning for this kind of transactions. However, one particular and rather important is conducting an environmental site assessment (ESA) or Phase I ESA to determine what the current conditions at the property are.
An ESA, if performed correctly, can discover the presence of any potential environmental liabilities that may have resulted from past or current property operations. From the seller’s perspective, and granted there are no environmental liabilities, the ESA determines that the property is clean and validates the asking price. On the other hand, if the ESA discovers the presence of environmental liabilities, the buyer has the opportunity to either walk away from the deal or decide to move forward at a discounted price.
In general, it is agreed that each party conducts its own ESA. It is relevant to consider that the majority of the lending institutions will require a Phase I ESA to be conducted during the loan application process. The following are four basic elements that buyers and sellers should know about conducting a Phase I ESA.
1. Hiring an Environmental Consulting Company
Phase I ESAs follow the guidelines of the American Standard Test Method (ASTM) E1903. There are many environmental consulting companies that can perform ESAs using this standard. However, not all companies interpret and follow the standard in the same way. Search for companies that have a good reputation and have conducted ESAs at many different properties. Experienced companies will be a bit costly, but you do not want to mess around with environmental liabilities. This is particularly important for buyers, as it will be in their best interest to find environmental liabilities before they purchase, and not down the road, when they are re-selling the property. It will be a nightmare to deal with environmental liabilities that a poorly-performed ESA did not encountered before.
2. Historic Evaluation:
The first stage is a historic evaluation of the property through the use of existing data base companies that provide information on past uses of the property since it was first constructed. Other available records from city engineering departments will provide useful information that may trigger areas within the property where the consultant needs to focus the investigation on. Areas of concern (potential environmental liabilities) that may need further investigation are selected during this stage. Some examples of historic uses that may trigger further investigation include:
- Gas stations that may have left contaminants such us petroleum hydrocarbons, heavy metals, or gasoline
- Dry cleaning and the use of chlorinated compounds
- Manufacturing plants with single or many potential contaminants of concern such as oils, lubricants or chemical components of the process
- Older properties with subsurface oil or petroleum containers
3. Property Inspection:
A representative from the consulting company will conduct a site visit to determine there are no visible conditions that may indicate spills or potential contamination. If applicable, a survey will be conducted with the property personnel to acquire more information about past uses of the property.
4. Generation of a Phase I ESA Report
The last stage of a phase I ESA is the preparation of a report detailing findings of the historic evaluation and site visit. The report will indicate whether the areas of potential concern are no longer a “concern” (i.e. no additional investigation is needed) or if further investigation (Phase II ESA) is required. Further investigation beyond the Phase I ESA may require the collection of soil and/or groundwater for chemical analyses. The results of the chemical analyses will dictate whether or not additional investigation is needed to determine the extent of contamination (i.e extent of the environmental liability).
Not only additional investigation beyond the Phase I ESA would be required if an environmental liability is encountered, but there will also be expensive designs and implementation of remedies for the contamination. Buying/selling properties can be delayed or cancelled based on results of the ESAs. In addition, the lender companies may refuse to proceed with lending process based on the ESA report. Thus, conducting a Phase I ESA is a very important step.