Guideline to Getting a Good Phase I ESA on your Property
Assessing the quality of property reports is key to understanding property conditions, and essential in hiring your next consultant.
Most parties buying and selling commercial property understand the necessity of obtaining and reading a Phase I Environmental Site Assessment (ESA) report. In addition to being an excellent source of due diligence for buyers, a Phase I ESA report can help form the basis for All Appropriate Inquiries (AAI) defenses to purchaser liability under the federal Superfund law. In this way the old adage “buyer beware” is codified in the law such that if the buyer fails to perform appropriate investigation to discover and become aware of conditions on the property prior to purchasing the property, then that buyer cannot claim ignorance as a defense against environmental liability later.
But not all Phase I reports are created equal, and sometimes it can be difficult to tell the good from the not so good and the bad. When evaluating the reliability of a Phase I ESA, consider whether it exhibits the following characteristics:
Performed to the most-current Phase I ESA standard (ASTM E1527-13, not -05 unless the report was finalized before November 2014). Technically, EPA allows the 2005 standard to be utilized through the end of October 2015. However, EPA finalized its decision to require the 2013 standard in November 2014, and the majority of consultants have been applying the 2013 standard for at least the past year or two.
Contains clear summaries of Recognized Environmental Conditions (RECs), Historical RECs (HRECs), Controlled RECs (CRECs) and non-scope considerations like Lead-Based Paint (LBP) and asbestos, sometimes referred to as Business Environmental Risks (BERs). Each category should have its own discussion, and the distinctions between the categories should be clearly explained.
Uses the correct terminology, correctly. The Phase I report should include definitions of special terms and acronyms, so even a non-expert can understand. There should not be any “blurring” or mixing of terminology nor any official-sounding but “made up” terminology inconsistent with the ASTM standard (e.g., terms like “Area of Environmental Concern” and “Potential REC” are confusing and inappropriate for a Phase I ESA).
Specifically delineated and detailed descriptions of conditions at the property, rather than brief blanket acknowledgements that conditions are present.
No “loose ends” or internal contradictions. A good Phase I report does not raise or hint at questions it fails to answer or explain (loose ends), nor does it inadvertently create new questions (contradictions).
Includes discussion of Vapor Encroachment, a new element in the 2013 standard that sometimes gets overlooked. Vapor Encroachment (and the related term Vapor Intrusion) are the result of volatile contaminants in soils and groundwater creating vapors that can affect the health and safety of a property’s occupants. A Phase I ESA should include a “Tier 1” Vapor Encroachment analysis or explain why it does not.
Ideally the report would not indicate that it is subject to change or updates based on information that was missing during the initial assessment (e.g., waiting for a response from a government agency). If it does, the follow-up documentation, which may be an update letter from the consultant, ideally should accompany the Phase I at the time of any meaningful review.
A Phase I ESA in almost every instance should not recommend Phase II testing or any specific remedial actions, unless these recommendations have already been followed or are scheduled to be followed soon. While they are allowed, recommendations for remediation as a rule are not required or even recommended by E1527-13 and are therefore gratuitous in a Phase I ESA report. Preliminary or unsubstantiated recommendations documented in a Phase I ESA report can leave an unwarranted, incorrect or unfounded suspicion in the record of a property that may unnecessarily complicate or spoil future transactions.
Professionals preparing Phase I ESA’s can always provide recommendations in another document, a conversation or in a presentation. (Although there is one technical exception when the environmental professional (EP) must render an opinion on the need for further assessment or investigation – i.e., the “unusual circumstances” when it is necessary to resolve whether a particular condition constitutes a REC – those circumstances almost never materialize, and even then, ASTM specifically states that a Phase II does not have to be the answer. See ASTM E1527-13, §12.6.1.)
There are also many desirable but not essential qualities of a good Phase I ESA. Higher quality reports will feature some or all of the following:
Non-Scope Items/BERs. A Phase I ESA is only required to cover RECs, HRECs, and CRECs, so coverage of non-scope items like asbestos, LBP, and the presence of wetlands and other habitat is added value.
o If it discusses asbestos or LBP, ideally (if not often) it references an actual asbestos/LBP survey or test results rather than just the Phase I consultant’s visual inspection and opinion.
o If it discusses wetlands, ideally it references an actual wetlands determination or delineation done by a wetlands consultant if such exists, rather than just referencing government-issue wetlands maps that can be imprecise and are not definitive.
Site Diagram. A Phase I ESA is easier to read if it includes a detailed site diagram drawn by the consultant and labeling key site and vicinity features and the locations of RECs, HRECs and CRECs, as well as non-scope items.
Review of Title Records. A review of title records for environmental liens and past uses of concern is required to satisfy the AAI threshold requirements. ASTM E1527-13 allows but does not require the Phase I consultant to do this review on behalf of the purchaser.
Local Environmental Professional. Each jurisdiction has its own laws and regulations, and each area has its own accepted professional standards and common environmental concerns. Although not essential, it can help if a consultant has a local presence where the property is located, or can utilize a local subcontractor with institutional knowledge and insight into local rules and conditions.
Consider these points when reading your Phase I ESA, or when reading a sample report to evaluate a consultant before hiring them. ASTM provides Phase I ESA standards, but they are not a complete formula. Consultants have their own methods of writing reports, and some regions and geographies have issues specific to them that require special consideration. A good Phase I ESA will deliver the important substance and actionable intelligence however the procedural requirements are met.
A high quality Phase I ESA report should meet the needs of the study property, no matter how unique. Often the mark of a good report is the degree of individualization and absence of boilerplate language.
Before hiring a consultant to perform a Phase I ESA, ask if they are willing to let you read a sample report. As a threshold test, again, a good Phase I ESA is written for a general audience. If you cannot read a consultant’s sample report with a critical eye and sufficiently understand the study property, then the report that consultant would write for your property probably will not deliver the information for the value.
Traditionally, real estate due diligence, including Phase I ESA’s, has been a buy-side expense. Potential buyers often gain temporary access by agreement to perform their own investigation of the owner’s property before buying (both to make sound economic decisions and to protect their AAI defense). But as a final suggestion to property owners, seller teams and redevelopers, consider performing your own, sell-side due diligence.
Proactively obtaining a Phase I ESA report can raise the marketability of a seller’s property by eliminating a step for potential buyers and delivering actionable information from a third party consultant. In the past, sellers have waited for the phone to ring from a developer to conduct property investigation, but this strategy can require eternal patience. Proactive due diligence can be actively shopped to known buyers and developers, or delivered to vendors, city planners, or the public to help tell the redevelopment story of a property and jumpstart deal potential with fresh intelligence. Serious buyers can update your Phase I or obtain a reliance letter from your consultant when they decide to proceed, saving them time and money and shortening the critical path to closing.