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Selling Your Business Real Estate: Environmental Due Diligence

We all know that today's real estate market is challenging enough without adding unnecessary hurdles. The environmental due diligence (EDD) commonly referred to as a Phase I...
Selling Your Business Real Estate: Environmental Due Diligence
We all know that today's real estate market is challenging enough without adding unnecessary hurdles. More than ever, the need to conduct environmental due diligence (EDD) commonly referred to as a Phase I Environmental Site Assessment (ESA) is a step in the real estate transaction process that should not be negated.

In a nutshell, a Phase I ESA conducted in accordance with American Society of Testing Materials (ASTM) standard designated as ASTM 1527-05 provides purchasers and lenders with a thorough standardized evaluation of the current and historical uses of a property for the purpose of identifying environmental impacts. Maybe more importantly, the Phase I ESA provides liability protection to lenders and buyers from environmental contamination which has impacted or has the potential to impact the property and human health. Finally, a Phase I ESA is a very useful tool in the identification of environmental issues that can affect the value of a property.

This article will address:

  • Why conduct a Phase I ESA;
  • What a typical Phase I ESA consists of, and;
  • Who should be retained to conduct a Phase I ESA.

Why a Phase I ESA is Necessary?

As summarized above, a Phase I ESA conducted in accordance with ASTM 1527-05 provides the buyer and lender (or other interested parties) with liability protection from being considered a potential responsible party (PRP) under the Comprehensive Environmental Response and Recovery Act enacted in 1980, commonly referred to as CERCLA. To paraphrase CERCLA, a PRP is; the current owner or operator of contaminated property; any party that owned the property at the time hazardous substances were disposed of at the site; anyone who arranges for the disposal of hazardous material at the property and anyone who accepts hazardous materials for disposal at a property.

Obviously the key phrase is "the current owner or operator of the property". However, CERCLA does provide for an Innocent Landowner defense for property owners who can demonstrate that they did not know and had no reason to know that the property was contaminated. This is where a Phase I ESA comes into play. For instance, suppose you purchase a property and discover during development or redevelopment (or sometime after receiving ownership) that prior to your ownership 500 gallons of methyl ethyl death was illegally dumped on the property under the cover of darkness . If you conducted a Phase I ESA in accordance with ASTM 1527-05, and that issue was not identified, you would not be considered a PRP. A Phase I ESA does not guarantee that a property has not been impacted but rather attempts to identify potential impacts to a site through readily available and consistent sources of information. Another example relevant to today's market is a foreclosure. If the lender does not complete a Phase I ESA prior to taking back the property, they can be considered a PRP as the current owner and be liable for costs associated with investigation, cleanup, human exposure, etc. There are also exclusions for acts of God or an act of war; although, I would not recommend relying on those as a means to avoid PRP status and the associated liabilities.

What Does a Phase I ESA Consist Of?

According to ASTM 1527-05, the tasks listed below are common to almost all Phase I ESAs. However, there are a number of variations in the scope of a Phase I study and some banks and institutional lenders have developed their own scope of services which can exceed the scope of a typical Phase I ESA.

  • Completion of an on-site visit to view present conditions and site usage (i.e. evidence of chemical spills or staining, stressed vegetation, etc) ; hazardous substances or petroleum products usage (presence of above ground or underground storage tanks, storage of acids, solvents, etc.); and evaluate likely environmentally hazardous site history.
  • Evaluation of risks of neighboring properties upon the subject property (adjacent gas stations, dry cleaners or industrial type properties)
  • Review of Federal, State, Local and Tribal Records out to distances specified by the ASTM 1528 and AAI Standards (ranging from 1/8 mile to 1 mile depending on the environmental database)
  • Interview of persons knowledgeable regarding the property history (past owners, present owner, key site manager, present tenants, neighbors).
  • Examine historic aerial photographs, city directories, Sanborn Fire Insurance Maps and if available other historical documents/maps of the site and vicinity. Historical documents are typically reviewed at a maximum of 10 year intervals and more frequently if the resources are available. Historical use of the site is typically reviewed back to at least 1940 or first developed use.
  • Examine municipal or county planning files to check prior land usage and permits granted.
  • Conduct file searches with public agencies (fire department or fire marshal's office, county health department, etc) having oversight relative to potential soil or groundwater contamination.
  • Examine current USGS maps to evaluate drainage patterns and possible changes to topography indicative of potential dumping.
  • If requested as part of the scope, examine chain-of-title for Environmental Liens and/or Activity and Land Use Limitations (AULs).

Who is Qualified?

ASTM E 1527-05 set forth parameters as to who is qualified to perform Phase I ESAs. According to ASTM, the Phase I ESA is required to be completed by or overseen by an Environmental Professional (EP). An EP is someone with 1) a current Professional Engineer's or Professional Geologist's license or registration from a state or U.S. territory with 3 years equivalent full-time experience; 2) have a Baccalaureate or higher degree from an accredited institution of higher education in a discipline of engineering or science and 5 years equivalent full-time experience; or 3) have the equivalent of 10 years full-time experience. A person not meeting one or more of those qualifications may assist in the conduct of a Phase I ESA if the individual is under the supervision or responsible charge of a person meeting the definition of an Environmental Professional when concluding such activities.

Inquire of potential companies if the Phase I ESA will be completed by an EP and request a copy of the statement of qualifications.

Tony LaBarre, PG, CHMM is President of Eclipse Environmental and has over 20 years experience conducting environmental investigations, subsurface investigations, remediation and brownfield granting. Mr. LaBarre can be reached at (828) 698-2342 or tony.labarre@gmail.com


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