A Checked Box for Lenders or a Valuable Tool for
Buyers and sellers of property are familiar with the need to have Phase 1 Environmental Site Assessments (Phase 1 ESAs) prepared when there is a transaction or a refinancing of a property. To most stakeholders, including the buyer, seller and lender, the Phase I ESA is part of the due diligence checklist, simply a report like a home inspection report, to identify potential environmental concerns with a property.
In the environmental consulting industry, Phase 1s are considered “loss leaders”, meaning there is little to no profit to be made conducting the Phase 1. Either the consulting company believes they must offer the service because their competitors offer it, or they believe that a certain percentage of Phase 1s will require follow up environmental work because the likelihood of contamination turned up during the investigation. Because the profit margin on a Phase 1 is at best slim, it is not uncommon for consultants to use lower paid and generally less experienced staff to conduct much of the Phase 1. One side note, there is no project that carries with it more risk for the consulting firm than a Phase 1, because if contamination is not identified during the Phase 1, but is found later in time, the consultant and its E&O provider could be on the hook for damages.
For the lending officer, their goal is to get the loan approved by the internal lending committee so they can get the sales commission. There is stiff competition between banks and the cost of a Phase 1 can make a difference of a sale or not.
These dynamics set the stage for the Phase 1 becoming a commodity in the marketplace and little thought is given to the value of the Phase 1 and conversely to the risk of having a Phase 1 completed that does not adhere strongly to ASTM Standard E1527-13.
So, what is the true value of a Phase 1 ESA? What is often misunderstood or unknown to Buyers and Lenders, is the actual liability protection afforded to potential purchasers by correctly completing a Phase I ESA. This liability protection is known as achieving bona fide prospective purchaser (BFPP) status through the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). People acquiring property, even with known contamination, can obtain BFPP protection if all-appropriate inquiry (i.e., completing a Phase I ESA) is completed prior to purchasing the property. The purchaser also must meet continuing obligations regarding any known or suspected contamination including taking reasonable steps to stop any continuing release, prevent a future release of hazardous substance, ensuring property occupants are not being exposed to contamination and there is not a threat of exposure to off-property persons. Obtaining BRPP protection can prove financially invaluable to the property owner or tenant, potentially saving hundreds of thousands or even millions in cleanup cost responsibility. Property owners without BFPP protection that did not contribute to or cause contamination at a property can still be held liable for cleanup costs by state and/or federal environmental regulators.
The Phase I ESA is a complex document that must be completed in its entirety to afford the prospective purchaser BFPP. Minor details that are often missed in Phase 1s can result in a court rejecting a BFPP claim for a property owner. These minor details include, but are not limited to, not listing the exact purchasing entity as having reliance on the report, the prospective purchaser not completing the required questionnaire and having an expired Phase I at the time of closing. This last point is especially important as we hear many parties state that they don’t need a Phase I ESA, as there was one previously completed for the property. The truth is that environmental standards change and what may have been acceptable several years ago may constitute an environmental concern under today’s environmental regulations. Unless the exact prospective purchasing entity is listed as having reliance in the Phase I ESA and the report is under 180 days old, the Phase I is likely not valid. Additionally, it should be noted that the 180-day window for Phase I ESAs is from the date the first record is reviewed by the report preparer, not the date the report was issued.
Baseball great Leo Durocher once said, “Baseball is a lot like church; many attend but few understand.” This can absolutely be applied to the world of environmental due diligence and Phase I ESAs. There are many environmental companies who claim to complete Phase I ESAs, but their product often will not afford the purchaser BFPP, even if it was completed prior to the property purchase. It’s the nuances that make the difference in the world of environmental due diligence. If you have questions or a need for environmental due diligence of Phase I ESA services, EnviroForensics would be happy to discuss your situation and, if appropriate, prepare a complete Phase I ESA that will provide liability protection and peace of mind for you and your business.
Disclaimer: We are not lawyers and cannot give legal advice, as such all Buyers should consult with qualified legal counsel when buying property.
Authored by:
Steve Henshaw, PG, CEO at EnviroForensics
Casey McFall, CHMM, Director of Real Estate Due Diligence at EnviroForensics
