51 Rustling Ridge Rd., Glasgow, KY 42141, US
After eighteen years of producing due diligence reports, in particular Phase I ESAs, the most often asked question we get is "Do I really need a Phase I ESA?". The quick answer is 'Yes', only a Phase I ESA compiled to meet ASTM E1527-21 Standard Practice and US EPAs All Appropriate Inquiries Rule will protect the user of the report against CERCLA liability. The Superfund law officially known as CERCLA (Comprehensive Environmental Response, Compensation and Liability Act) imposes liability on parties responsible for, in whole or in part, the presence of hazardous substances at a site. The not-so-simple answer is there are Limited Environmental Assessments that are used by the banking and investing community as tools for making business decisions for issuing a mortgage or buying a particular property. Limited Environmental Assessments are generally faster and cheaper than a ASTM E1527-21 compliant Phase I ESA but do not provide CERCLA liability protection. The most common of these Limited Environmental Assessments is the Environmental Transaction Screen (ETS), which has its own ASTM Standard Practice (E1528-14). Most Limited Environmental Assessments can be tailored made to hold down costs. The catch is, if a Limited Environmental Assessment finds a Recognized Environmental Condition, then a full-blown Phase I ESA would likely be recommended, which would add to the overall cost and time to completion for the project.
A few key things to consider when trying to decide if you need to start off with a Phase I ESA or if a ETS may be appropriate:
Is CERCLA Liability protection important to you? If so, then a Phase I ESA will be necessary.
What property type is involved? If it is an industrial property or a petroleum retailer, then a Phase I ESA is advisable. If it is an office building, apartment building, shopping center or other low risk property type, an ETS or other Limited Environmental Assessment may be considered. If it is vacant land that has never been developed, then an ETS or other Limited Environmental Assessment may be considered.
Where is the property located? This is completely different than property type because you are looking at all surrounding properties in the area during an Environmental Site Assessment to evaluate the likelihood of an impact to the subject site. If it is an urban property or any commercial property with a long developmental history, then a Phase I ESA is advisable. If the property is in a mostly undeveloped area, then an ETS or other Limited Environmental Assessment may be considered.
Many mortgage holders have their own requirements for ESAs. For example, Fannie Mae, Freddie Mac, and HUD all have their own requirements for due diligence.
I cannot tell you how many times I have heard “I’ve lived here my whole life and that apartment building has always been there.” Many times, my clients are lending or investing in a residential property, and to the best of their knowledge the area has always been residential. It is easy to believe in these cases that a Phase I ESA is not necessary, and this is understandable, especially when our clients feel pretty familiar with a particular property.
A Phase I ESA by definition has to track the property use to its first developed use. If the property was developed after 1940, then tracking the property to 1940 is sufficient. If the property was first developed in 1825, then the Phase I ESA should track the use of the property to that date. Historical uses of a property can easily go well beyond the memories of people that are familiar with the property. Not only can surprises arise with the subject property, but often time’s adjacent properties and nearby properties have hidden pasts that predate any current recollections.
For example, in Bowling Green, Kentucky the city had a revitalization program in which several blocks of older homes were relegated to make way for new multi-story apartment complexes. After razing the homes and during the dirt work for the new apartments the contractor discovered several underground storage tanks. If a Phase I ESA had been performed, it would have shown that on the corner a gas station existed in the 1920’s some eighty years prior to the building of the residential homes. These prior uses are particularly important to know about because environmental regulations and technologies to prevent contamination to soil and groundwater were not in place to dictate how underground storage tanks were installed, maintained, or removed.
In another case in Glasgow, Kentucky an investor was buying an apartment complex which was built in the 1960’s. Our clients’ main concern was for lead based paint and asbestos and requested a Phase I ESA. To their surprise, in the 1940’s and 1950’s the property was the location for a metal plating facility. The sequential Phase II ESA showed lead and arsenic levels in the soil substantially above EPA’s Residential Screening Levels.
In order to understand what is required by the EPA, it helps to understand why All Appropriate Inquiry and Due Diligence were created. Turning point environmental disasters such as the Love Canal, which caused public outrage in the 1970s, was the genesis of federal environmental regulation holding responsible parties accountable for cleanup costs and public liability. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) or the “Superfund” law was enacted in 1980. This law gave the federal government the power to regulate the response and cleanup activities of the release of hazardous substances. In addition, it gave the federal government the power to pursue Responsible Parties or Potentially Responsible Parties for the reimbursement of cleanup cost.
Written into the CERCLA law was an exemption from liability for cleanup costs. If a perspective owner conducts an All Appropriate Inquiry (as defined in ASTM 1527-21 Standard) to satisfy the Landowners Liability Protections provision, then the owner can obtain exemption from liability for contamination that existed on the property prior to the property transaction. The ASTM (American Society for Testing and Materials) E1527-21 Standard was designed specifically to meet the requirements to obtain exemption from pre-existing environmental conditions. The ASTM 1527-21 outlines the Scope of Work that has become accepted as the industry standard for protection to meet the requirements of CERCLA liability as an innocent landowner, a contiguous property owner, or a bona fide prospective purchaser.
A simplified scope of work includes:
1. Discovery of Recognized Environmental Conditions (RECs) through research of reasonably obtainable historical documents.
2. A site reconnaissance to obtain information indicating the likelihood of identifying RECs. This must include findings from interviewing a designated Key Site Manager.
3. At least one interview from a State or Local Government Official, such as the local or state fire marshal, Health Department, local environmental agency, or the local building permitting agency.
4. Preparation of a report that adheres to a very specific format consisting of a Summary, Introduction, User Provided Information, Records Review, Site Reconnaissance, Interviews, Evaluation, Non-Scope Services, and Appendices of supporting data.
Bankers Environmental Evaluations ASTM 1527-21 compliant Phase I Environmental Site Assessment Scope of Work can be found here: Phase I ESA
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