FEATURE ARTICLE, FEBRUARY 2005

Site Investigation
With Phase I Environmental Site Assessments, buyers can limit their liability for environmental conditions.
Greg C. Moriates, CHMM

It has become standard procedure to obtain a Phase I Environmental Site Assessment (ESA) when acquiring non-residential real estate property, especially if there is to be any type of financing used to make the acquisition. Most developers and real estate professionals accept the requirement as part of their due diligence, but may not entirely realize the importance of the requirement, or exactly what a Phase I ESA accomplishes, aside from giving an environmental snapshot of the property.

During the early 1980s, dangerous levels of contamination were identified in subsurface soil and groundwater at the infamous Love Canal area in Niagara Falls, New York. Love Canal, as well as thousands of other contaminated sites around the country, triggered a tremendous public outcry against industrial pollution. To combat these very serious environmental problems, the federal and state governments began aggressively enacting laws to protect the environment and provide for liability for those who caused serious environmental pollution. Of all the laws that have been enacted in the past 20 years, it is perhaps the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) that most impacts the way real estate property is bought and sold in the United States today.

The main objective of CERCLA (also known as “The Superfund Act”) is to classify on-site substances and hazards, identify the parties responsible for the contamination, and hold the responsible parties liable for the associated cleanup costs. In 1986, CERCLA was extensively amended by the Superfund Amendments and Reauthorization Act (SARA). SARA’s main objective was to clarify CERCLA regulations and, most importantly, provide for an “innocent landowners defense.”

The innocent landowners defense was put into place to protect property owners that acquire property and subsequently discover that hazardous substances had previously impacted subsurface soil and/or groundwater without their knowledge. This defense is available only if the party acquiring the property has no knowledge of on-site contamination prior to acquisition. Additionally, the property owners must establish at least one of the following criteria: they did not know and had no reason to know of the presence of hazardous substances utilized on the property; they are a government entity that acquired the property involuntarily or by eminent domain; or the property was acquired by inheritance or bequest. In order to support the innocent landowners defense, it is necessary to document the environmental due diligence that was undertaken before purchasing the property. A Phase I ESA, by its very nature, supports these due diligence documentation requirements.

In addition to potentially supporting the innocent landowners defense for the owner of the property, a Phase I ESA is often required by lending institutions and insurance underwriters for commercial, industrial and multifamily acquisitions. A lender will require a Phase I ESA to ascertain whether a potential environmental problem could affect the marketability, and thereby the value of the property, should a foreclosure become necessary.

The basic Phase I ESA requirements are dictated by the American Society for Testing and Materials’ (ASTM) Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process (ASTM Designation E1527-00). ASTM E1527-00 provides guidelines for Phase I ESAs to satisfy the requirements of CERCLA and SARA. The purpose of the Phase I ESA is to identify recognized environmental conditions (REC) that have or may have impacted the site. Examples of RECs include the past use of the site as a dry cleaning facility with multiple listed releases to on-site subsurface soils; identified releases from identified hazardous drums; or the use of an adjacent property as a gasoline filling station with listed active underground storage tank releases affecting soil and groundwater conditions. RECs, or the lack of, are identified through the following ASTM procedures completed during Phase I ESA activities.

Records Review

The records review process is conducted by obtaining current and historic documentation to determine use of the property and surrounding properties to determine if RECs exist. There are several methods of performing records review. One is to submit Freedom of Information Law (FOIL) requests to federal, state and local regulatory agencies, including the U.S. Environmental Protection Agency, local health department, local fire department, and regional pollution control agency. An inspector can request documentation of environmental conditions to ascertain if the site may have impacted the environment and/or pose a human health concern. Local, state and federal databases can be searched to determine if the property or surrounding properties are located in various environmental databases concerning properties with leaking underground storage tanks, hazardous waste sites, petroleum bulk storage tanks, Resource Conservation and Recovery Act hazardous waste generators. Additionally, Sanborn Fire Insurance maps, aerial photographs, building department records and historic topographical maps are reviewed to determine past and current use of the property and surrounding properties.

Site Reconnaissance

The purpose of site reconnaissance is to observe current condition and to obtain information about historical operations in addition to the current use of surrounding properties. During the site reconnaissance, the inspector determines if conditions exist that have or may have impacted environmental conditions at the property. For example, if during a site reconnaissance an inspector observes steel drums containing hazardous materials with evidence of a release impacting soil conditions, and the adjacent property is a gasoline fillings station that has documented active releases that impacted soil and groundwater conditions with leaded gasoline, these RECs will need to be addressed in the Phase I ESA. Additionally, the inspector is searching for evidence of underground storage tanks, stressed vegetation, sheens on surface water, oil/water separators, spills, drainage points or anything else that may indicate an environmental issue.

Interviews

During the interview process, credible people who are familiar with the current and past use of the property, such as office managers, current owners or operations manager, are interviewed. Information pertaining to operations, chemical storage, past environmental conditions, and heating and electrical systems is discovered from these interviews.

Additional, non-ASTM scope-of-work items may be requested by the client, depending on individual needs. These non-ASTM items may include asbestos and lead surveys, radon, indoor air quality testing, and mold identification. These non-ASTM items are not required for innocent landowners defense but may be required by the lending institution and/or the insurance underwriter.

Phase I ESA Report

Once the above-mentioned searches, reconnaissance procedures and interviews are performed, a comprehensive Phase I ESA report is compiled and submitted to determine if RECs were identified, to distinguish potential environmental liability and to secure the innocent landowners defense.

While it may be a lending institution requiring the Phase I ESA, it is important to realize that the report will also protect a new owner from potential environmental liability and exorbitant remediation costs. q

Greg Moriates is the president of Expedited Environmental Services in Massapequa Park, New York.

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