Phase I Environmental Site Assessments (ESAs) are considered the gold standard for environmental due diligence by lenders, investors, real estate brokers, and prospective purchases during commercial real estate transactions.
But the purpose of a Phase I ESA is defined as “good commercial and customary practice in the USA for conducting an environmental site assessment of a parcel of commercial real estate with respect to the range of contaminants within the scope of the Comprehensive Environmental Responses, Compensation, and Liability Act (CERCLA) and petroleum products”.
So by this definition, a Phase I is limited to CERCLA-defined contaminates and petroleum products—yet these items are far from being the only environmental risks associated with the purchase of commercial real estate!
In fact, Section 13 of the American Society for Testing and Materials (ASTM) standard for Phase I ESAs (ASTM E1527-13) lists a variety of “Non-Scope Considerations” which are not included in a standard assessment. Among these items reside some pretty heavy-hitters when it comes to environmental risk, including asbestos, mold, lead-based paint, indoor air quality, wetlands, and regulatory compliance, to name just a few.
Parties involved with commercial property transactions should be aware of these limitations in the Phase I ESA process and understand the impact these non-scope items can have on the use and redevelopment of their investments. These non-scope items can cause unforeseen expenses, delayed project timelines, and in some cases may even result in the loss of usable land associated with the property.
For example, asbestos, lead-based paint, and indoor air quality issues within a building can all cause additional requirements during renovation, demolition, and/or occupancy of structures on a property. Remediation costs for some of these toxic materials can rival the expense of assessment and cleanup costs related to a petroleum release! Mold and water intrusion issues within a structure may lead to extensive remediation and redesign on what could otherwise appear to be a move-in ready building.
Another potentially overlooked factor: wetlands. The presence of wetlands on a property can limit the amount of land available for improvements. Mitigation costs to develop designated wetland areas are often not budgeted for (or expected) during site acquisition.
Regulatory compliance issues that are inherited during property transactions also can produce unforeseen costs, delayed project timelines, and paperwork. Such hindrances include improper stormwater management design/permit compliance, non-compliant air emissions, and Resource Conservation and Recovery Act (RCRA) violations not associated with a release, to name a few.
Yet the above-mentioned items are not required to be discussed or considered in an ASTM 1527-13 compliant Phase I ESA. Many of these non-scope items have the likelihood to negatively impact planned use of the property similar to a release of hazardous waste or petroleum, but are often undiscovered until the acquisition is complete. That’s why purchasers, lenders, and their representatives should consider the entire environmental picture during the due diligence period to ensure the best return on investment and to eliminate unforeseen “non-scope” environmental pitfalls.
In-depth assistance from environmental experts—professionals who can see beyond the Phase I—can help guard against surprises from what you don’t see in a conventional Phase I ESA.