Whether you’re buying an existing commercial real estate property or breaking ground on a new one, you may need a Phase 1 Environmental Site Assessment. After all, you’re not only buying the property, but all of the history that comes with it. That history may include harmful chemicals and environmental contaminants that make it hazardous to people living, working, or otherwise spending time there.
That doesn’t mean you can’t move forward with the transaction, only that you have to do a little more work to ensure everyone’s safety. There’s a lot of environmental information a lender, investor, or developer needs to know before they can confidently proceed with a transaction.
A Phase 1 Environmental Site Assessment can help you get a clear picture of the property’s condition, analyze those conditions, and mitigate any dangerous environmental issues early in the development and investment process. Doing this work now ensures a smoother development process later.
What Is a Phase I Environmental Site Assessment?
A Phase 1 Environmental Assessment, sometimes referred to as a Phase 1 ESA, Phase 1 Environmental, or simply a Phase I, is a series of environmental tests performed to research the current and historical environmental uses of a property during a commercial real estate transaction.
The goal is to gain information about the environmental history of the property — if there is any contamination from harmful chemicals, or any information that a lender, investor, or developer would need to know that would impact their building plans before going through with the transaction.
In many cases, a Phase I ESA is required by bank lenders as part of the lending terms, though private lenders may also require one as part of their loan agreements.
“From the forgotten historic corner gas station site, auto repair facility, industrial manufacturing sites, or dry-cleaner site, there are numerous past activities which could have affected groundwater and/or subsurface media at commercial sites,” Daniel Greenblum, Capital Markets Analyst at Lev told Leverage.
“It is essential,” he emphasized, “for safeguarding a lender’s investment. Environmental due diligence is needed to ensure the lender is not inheriting someone else’s environmental legacy, should the borrower default.”
When Is a Phase 1 Environmental Required?
As Greenblum explained, “Requirements vary between lending institutions, but Environmental Site Assessments are typically required during the due diligence process to avoid potential environmental risk and liabilities during an acquisition or a refinance of a commercial property.”
Just the same way a lender or investor will want to do financial due diligence before moving ahead with a project, they’ll want to do the same for environmental needs.
He added, “The Phase I ESA report is comparable to that of a title search performed before purchase or refinance. An ESA ensures the investment is sound and that there are no skeletons in the closet.”
It may also be required to obtain zoning permits or to determine if a site is a brownfield and may qualify for tax credits or other funding to assist with cleanup. Adaptive reuse projects often face Phase 1 ESAs.
Again, it’s important that the environmental site assessment takes place before you buy the property. If you manage to skip it and contamination is found while you’re the owner, you may be on the hook for remediation.
In addition to the commercial property transactions and bank loan requirements mentioned above, there are a number of other situations where a Phase I ESA is necessary, including transactions involving the following property types:
- Property on which industrial or commercial operators used regulated hazardous materials, including lumber treatment, electroplating or dry cleaning
- Property located near current industrial or commercial operations
- Property used for oil or gas drilling
- Transactions involving property with known environmental liens
Who Performs a Phase 1 ESA?
Generally, the lender of the borrower will hire a third party environmental engineering firm or similar company to conduct the Phase 1 assessment. It can be done by a number of professionals, including a geologist or engineer, but they should qualify as an Environmental Professional per the standards set by American Society for Testing and Materials (ASTM).
Who Pays for a Phase 1 Environmental Site Assessment?
In an acquisition, the buyer pays for the environmental site assessment report. In a refinance, the owner will pay. In both cases, it’s usually the bank or other lender that asks for an ESA in the first place.
How Long Does a Phase 1 Environmental Assessment Take?
If a property has no or little history of development, the process can take around two weeks to complete both the assessment activities, and the report. If the land has a longer history of development, that can stretch to four weeks or more, depending on how many reviews the report goes through before it’s complete.
How Long Is a Phase 1 Environmental Good for?
In general, Greenblum said, Phase I assessments are required each time a property is sold or refinanced, but “most lenders will accept a Phase 1 from 6 months ago or less, otherwise it must be updated.”
How Much Does a Phase 1 Environmental Site Assessment Cost?
Typically, a Phase 1 Environmental Assessment costs between $2000-$5000. If contamination is found and the project needs to move on to further testing and more reports, the price will go up from there, anywhere from $5,000 to $200,000. If remediation to address the issues found in the report is required, you may have to spend several thousand more to clean up the property.
Steps of a Phase 1 Environmental Assessment
The American Society for Testing and Materials (ASTM) sets the standards for the reports, but each Phase 1 ESA report will be different depending on the jurisdiction, property, and lender requirements. The reports requirements are also updated based on new research and technology.
That said, the following steps are generally part of the phase 1 environmental checklist of ASTM standards required for completing these assessments, but not always in this order.
- Site Visit – Environmental professionals visit the site to visually investigate current and past environmental condition
- Historical Property Information Compilation – This includes getting aerial views of the property from current and historical photographs. Your inspector will look at fire insurance maps, historical city directories, and topographic maps. Some local and state agency records could be reviewed as well.
- In-Person Regulatory Agency File Reviews – Reviewing state and local agency records from places like the Health Department, Building Department, Department of Environmental Protection, and any similar agencies that might have interacted with the property.
- Database Reports and Government Record Audits – Each phase 1 assessment involves getting reports from government agencies and databases about the history of the site, i.e. are there any underground storage tanks, above ground storage tanks, any areas that currently or previously store hazardous substances.
- Interviews with Current and Past Property Owners – This step helps inspectors get a sense of past owners’ experience with the property and maybe provide information that might not be found in the previous searches
- Researching Environmental Liens and Activity Use Limitations – You’ll want to find out if the state or municipal government has previously set limits on uses for the property and if they’ve gotten any environmental liens, a legal document indicating that a property contains or has been exposed to harmful elements
- Conclusions and Recommendations by the Environmental Professional – The report’s author makes recommendations for any next steps based on the results of the assessment. If there is no contamination, no further environmental action is needed. If there is, the report will suggest additional tests.
2 More Types of Environmental Site Assessments You Should Know
Depending on the results of a Phase 1 Environmental Assessment, your environmental professional or your lender may recommend additional assessments and testing before going through with the transaction.
Phase II Environmental Site Assessment
If the first assessment found evidence of contamination, you or your lender may request a Phase 2 Environmental Site Assessment. Your inspector may take samples of the air, water and soil to run tests on in a lab. If the test shows additional evidence of contamination, they may recommend a Phase III ESA.
Phase III Environmental Site Assessment Assessment
If your project has reached the need for a phase 3 assessment, that means contamination has been discovered and needs to be remediated before development can move forward. During this phase, inspectors will work to eliminate the contamination and restore healthy and safe environmental conditions. However, this process could take months or even years depending on how contaminated your site is.
Phase I Environmental Site Assessments Are an Essential Part of Due Diligence
The results of a Phase 1 Environmental can impact whether a bank or other lender will go through with key loans. If the property does not have any hazards, the deal has fewer roadblocks and can move ahead. If it does, the investor seeking a loan must work with the lender to secure a Phase 2 ESA and potentially a Phase 3 ESA to address and remediate any contamination.
In the same way a deal would have to be reevaluated if challenging financial information was discovered, environmental conditions that include contamination is a sign that something needs to be changed or fixed. Completing the assessment early in the process reduces the chances of borrower default and ensures projects can proceed smoothly.