Phase I ESAs: Helping the Buyer (and the Lender) Beware

One of the early stages in the purchase of a commercial property can ultimately prove to be one of the most critical: the Phase I Environmental Site Assessment (ESA).

The Phase I ESA is a general overview of the property’s environmental condition, and while it is not always involved in cash purchases, it is typically required in loan transactions.

The reason the Phase I is so critical is that this is the stage when potential environmental problems are spotted — or overlooked — that could prove troublesome and costly for years to come.

Granted, if the property is (for example) a relatively new office building on a previously unused lot, then the Phase I is just another piece of paperwork that can probably be completed by a properly trained individual without a high level of expertise.

However, an expert Phase I could emerge as an extremely valuable point of discovery if the property in question:

  • is industrial;
  • has been the site of a gas station or dry-cleaning operation;
  • has been in commercial use for decades;
  • has ever been used for agricultural purposes;
  • contains any underground fuel tanks;
  • is adjacent to natural waterways;
  • abuts properties that possess any of the above characteristics.

Situations such as these can raise environmental issues that call for professional consultants who are familiar with current codes and regulations, and who are aware of the most recent developments within the DEP and the legislature.

A thorough Phase I can pinpoint sources of contamination in and around the property. The purpose is to provide an “innocent landowner” defense in the face of regulatory liability.

When the borrower can’t afford to pay for contamination found on the property, the result is often a foreclosure — at which point the lender is left with an impacted property that may not cover the balance on the loan.

A true “lose/lose” situation.

Professional consulting, with a thorough knowledge of the latest remediation and closure strategies, can often save the transaction for both parties.