Phase 1 ESA Lenders, Leasers, and Purchasers
Written by Kevin Taylor, P.E., P.G.
Department Manager | Environmental
Prior to acquisition or development of real property, a critical step which can protect for legal and fiscal interest, is an assessment of environmental conditions. There can be many reasons for performing environmental due diligence including, but not limited to lender requirements and liability protection at both federal and state levels.
Below are common reasons to perform a Phase I Environmental Site Assessment (ESA), and subsequent environmental investigations:
Lender Requirements and CERCLA Liability:
Should a borrower default on their loan and enter foreclosure, the environmental liabilities associated with real property, due to either historical site activities or ongoing operations at the subject property or adjoining properties, could be inherited by the lender.
The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and later Brownfield amendments provide mechanisms for purchasers of property, and other landowners, to obtain freedom from environmental liabilities by performing All Appropriate Inquiries (AAIs). The standard process to initiate the liability protection process is to perform a Phase I ESA and evaluate for the presence of Recognized Environmental Conditions (RECs), Historical RECs (HRECs), and Controlled RECs (CRECs), as well as other conditions indicative of potential environmental impact and financial liability like Business Environmental Risks (BERs). Hence, lenders will require their borrowers to pursue a Phase I ESA and determine if any recognized environmental conditions are associated with the subject property, or adjacent property. By performing this environmental due diligence, the investigation is aiding the lender, and you, in divesting from environmental liability.
Bargaining Power:
By “uncovering” environmental contamination, a potential property owner is providing the documentary evidence of historic or ongoing contamination prior to ownership of the property or business. With this information in hand, a purchaser can request that the owner remediate these conditions prior to purchase or can use this information as a financial consideration of the real estate transaction.
It is not uncommon for the potential purchasers of property to use the information uncovered within the Phase I ESA as a bargaining chip, often reducing the offer price by tens of thousands of dollars. However, by the purchaser performing these investigations in advance, they are controlling the exchange of data, and likely in their favor. It can be advantageous for sellers to also hire an environmental firm to perform a Phase I ESA and have the knowledge and trust that the reports are prepared with their interests in mind.
Leasing Property:
When occupying new space for your business, it can be advantageous to perform a Phase I ESA and document the recognized environmental conditions posed by prior tenants and ownership. As along a Phase I ESA is performed within 180-days prior to occupancy of the site, generally, leasers of real property can qualify for Bona Fide Prospective Purchasers liability protection afforded under federal legislation.
Summary:
The United States Environmental Protection Agency continues to vet the American Society for Testing and Materials (ASTM) revised and approved standard for conducting Phase I ESAs, known as E1527-21. In general, users should expect to see more consistency in Phase I ESAs prepared by environmental professionals through the usage of standard terminology and the mandatory inclusion of standard resources and required documentation. Users can also expect to see RECs cited due to the likely presence of contamination and significant data gaps identified in reports. H2M’s clients should not expect to see any drastic changes to Phase I ESAs being issued since H2M has already included maps and photographs, identified emerging contaminants when appropriate for a subject property, reviewed and included the standard historical resources, and evaluated the current standards for unrestricted use before classifying HRECs.
For more information about Phase 1, please contact:
Stephen I. Kaplan, P.G.
Practice Leader | Environmental
Phone: 631.392.5250
E-mail: skaplan@h2m.com
