FEATURE ARTICLE, MAY 2007

PHASE I ENVIRONMENTAL SITE ASSESSMENTS
What are your responsibilities in regards to the new Phase I Environmental Site Assessment standards?
Kyle E. Thomas, P.E. and Wendy A. Marsh, J.D.

As most investors know, a Phase I Environmental Site Assessment (also commonly known as a “Phase I” or “ESA”) is often required as a component of due diligence for a commercial real estate transaction, especially if bank financing is sought. A Phase I ESA is performed to evaluate a site for known or suspected recognized environmental conditions (RECs), ostensibly to set up a viable defense to future liability under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), which establishes liability for hazardous waste site contamination. As a practical matter, the Phase I ESA also allows real estate investors and their financiers to make informed business decisions with knowledge of the environmental condition of a given property prior to purchase. 

On November 1, 2005, the United States Environmental Protection Agency (EPA) published a final rule setting forth federal standards for performing all appropriate inquiries (AAI) to properly assess a property for the presence or potential presence of environmental contamination. The rule, which became effective on November 1, 2006, expanded the level of environmental due diligence required for an ESA for purposes of qualifying for certain defenses under CERCLA.  Prior to the publication of the rule, the prevailing standard for performing ESAs was ASTM (American Society for Testing and Materials) guidance 1527-00, the Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process (May 2000). In response to the rule, ASTM revised and replaced its guidance to incorporate the AAI requirements so that, theoretically, compliance with the new ASTM standard should satisfy the criteria for the defenses to CERCLA liability in the future. While it is not known whether courts will uphold the defenses afforded under CERCLA where compliance with the new AAI requirements is demonstrated, it still makes good business sense to fully understand the environmental condition of any prospective real estate investment, whether in the nature of leasehold, outright purchase or security interest, which, by extension, requires familiarity with the new standards for ESAs.

New User Responsibilities:

In addition to specifying new requirements on the part of the provider (i.e. the environmental professional) of services, the new standards impose certain new requirements on the user (e.g. the real estate investor). They require users to provide the following information, if available, to the environmental professional:

1) Environmental cleanup liens that are filed against the site under federal, tribal, state or local law.

2) Activity and land use limitations (AULs), such as engineering controls, land use restrictions or institutional controls, that are in place on the site or that have been filed or recorded in a registry under federal, tribal, state or local law.

3) Specialized knowledge or experience related to the property or nearby properties, for example, is the user involved in the same line of business as current or former occupants of the property or an adjoining property so that he or she would have specialized knowledge of any chemicals and processes used?

4) Knowledge of whether the purchase price for the property reasonably reflects its fair market value and, if not, whether the lower purchase price is because contamination is known or believed to be present. 

5) Commonly known or reasonably ascertainable information about the property that would help the environmental professional identify conditions indicative of releases or threatened releases, such as past uses of the property, specific chemicals that are present or once were present at the property, spills or other chemical releases that have taken place at the property, or environmental cleanups that have taken place at the property.

6) Obvious indicators that point to the presence or likely presence of contamination at the property.

New Responsibilities on the part of the environmental professional:

Among the requirements imposed on an environmental professional performing Phase I ESA services are:

1) Certain minimum qualifications with respect to education, experience and licensing, and a requirement that the ESA report certify and document that the qualifications have been met.

2) More exhaustive interviews with current site owners and occupants as well as owners and occupants of neighboring or nearby properties, and additional review of local government records and environmental cleanup liens.

3) Identification of data gaps and sources consulted to address or fill them, and evaluation of the significance of such data gaps with respect to the potential for releases and threatened releases concerning the property.

Although it would not appear so from the length of the lists above, the more rigorous changes in the new standards apply to the environmental professional. A failure by either the environmental professional or the user to adhere to the new standards, however, may have both a short- and long-term impact on the reliability of the ESA. It could adversely impact the ability of an investor to make an informed business decision in the near term, and the potential to mount a successful defense from CERCLA liability in the future.

Further, since the user’s failure to provide necessary information to the environmental professional, whether due to willful omission or unavailability of the information, must be identified as a data gap in the ESA, the issue becomes documented for future transactions associated with the property. Thus, the new responsibility imposed on the environmental professional has implications to the user as well.

It is essential that users are knowledgeable of their new responsibilities in the arena of environmental due diligence. If a user retains a consultant for such services, the user should verify that the consultant qualifies as an environmental professional under the new standards for Phase I ESAs and has demonstrable proficiency with the new standards. The user should also strive to provide all information necessary for the environmental professional to adhere to the new standards, in order to avoid the identification of data gaps in the ESA report. When it comes to environmental site contamination liability, ignorance is likely to be anything but blissful. 

Kyle E. Thomas, P.E. is an environmental engineer and is the principal of Acquisition-Support Environmental, and Wendy A. Marsh, J.D. is a partner with Hancock & Estabrook, LLP. 


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