FAQ: Do I need a Phase I ESA?

Why is a Phase I ESA Conducted and Do I need One?

When do I need a Phase I ESA?

Very often we hear the same question about Phase I Environmental Site Assessments.  For many people who’ve never purchased commercial or industrial properties before, or for anyone dealing with refinancing a commercial or industrial property, it’s natural to have many questions.

One question almost everyone asks about Phase I ESA is:  do I need one?

The issue is, there’s no right or wrong answer regarding whether or not you need a Phase I Environmental Site Assessment.   Let’s discuss the issue and see if we can shed some light on the subject.

Do I really need a Phase I ESA?

This is a fabulous question, and here’s the quick answer:

Often times yes, you’ll must a Phase I to proceed with a real estate transaction.

Sometimes times no, you might not need one.  However, you are unwise to gamble and not get one.

If you don’t understand why you need one, then you might not understand the purpose of an ESA, and all the beneficial things it affords you.  You might want to learn more about what a Phase I ESA is first and then consider whether you really need one.

Assuming you either know what a Phase I is, or you’ve read the article, let’s review the most common reasons why people need a Phase I prior to purchasing property, a business, refinancing a loan, or any other reason Phase I ESA are usually performed.

My bank says I need a Phase I Environmental Site Assessment.

This is the most common thing we hear from people.  Whether it’s a bank, lending institution, legal counsel, or someone else who’s driving the bus while you’re in a purchase or refinancing process, we hear this often.

Usually, it is required with no other reason or purpose given.  So when one says a bank required it, do I need it, what they’re really mean is “I do not know what it is and I have no idea what it means to me.   I really don’t care about it, I just need to check this item off the list of required documents”.

If this is the case, you will need a Phase I to continue with whatever it is you’re in the middle of.  The entity requesting that you get one probably won’t proceed without a Phase I Report regardless of what you do.

The reasons you need a Phase I ESA.

Notwithstanding what you may believe, the entity saying you need a Phase I isn’t saying so just to trick you out of money.  If it’s a bank and they’re providing a loan or refinancing, they’re shielding their investment. If it’s legal counsel, they are ensuring you avoid possible liability.

Here is some history to understand what a Phase I ESA really is used for.

In 1980, the Federal CERCLA regulations were passed by Congress and signed into law. CERCLA stands for Comprehensive Environmental Cleanup and Liability Act (note the word liability there). This Act, commonly known as the Superfund act, was created in the wake of Love Canal, one of the most famous cases in the United State’s environmental history.  Love Canal was in northern New York.  A huge number of drums were buried with industrial by-products.  The drums leaked into the ground causing plenty of health and environmental issues to the surrounding community.

It was a man-made disaster.   Someone had to clean it all up.  Someone was on the hook for the costs of cleanup, remediation, etc.  It was a mess with fingers pointing at various entities that were in some way responsible.

So, CERCLA is a law that deals with the cleanup of contaminated sites.  It also requires that when possible, responsible parties pay the cleanup costs. In short, the polluter pays.  Especially since the cost of cleaning up hazardous materials and remediation to the local environment (could be groundwater contamination, soil contamination, etc.) can be remarkably high, it’s important that the right party pays for the mayhem.

So inherent in CERCLA is the concept of “liability”.  Whoever made the mess, is the entity to pay to clean it up.  This may involve reimbursing the government for the costs of the cleanup.

The concept of CERCLA liability also stretched past just who made the pollution but also to those who might have retroactive liability.  For example, the entity that owns the land after the contamination occurs, or the entity that had (or has) the greatest ability to pay the cleanup costs. No matter how you look at it, there is a lot of liability to go around.

Is the property found to be contaminated? Then someone will pay for it, and it might just be you regardless of whether you caused it or not.

Enter SARA, or the Superfund Amendments and Reauthorization Act.  Introduced in 1986, it clarified the concept of the acquisition of a contaminated property without knowledge that it was contaminated.  The act required that “the defendant must have undertaken, at the time of the acquisition, all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial and customary practice.”  Take note of the use of the phrase “all appropriate inquiry” since we’ll hear that again soon.

The Innocent Landowner Defense

The idea of the “Innocent Landowner Defense” was created for owners of any property found to be contaminated.  If the owner had no reason to recognize there was contamination at the time of acquisition through the process of making all appropriate inquiry into past ownership and uses of the property, then there was a defense against this CERCLA liability.

In other words, if you did not know that the site is contaminated and you did your homework to examine the property before you purchased it,  you can’t be held responsible for the costs of the cleanup.

Keep in mind that we are not lawyers, and we are not giving you legal advice. We are environmental consultants who have done hundreds of Phase I ESAs.  We’re providing you with a common man’s version of all these statutes. If you actually need the legal translation, then we think you should communicate with a good environmental attorney. Nothing in here is meant to be legal advice.

So we discussed the CERCLA liability, and we have discussed the SARA limitations on liability for innocent landowners who have engaged in the all appropriate inquiry process.

Well, here’s the sticking point. What constitutes “all appropriate inquiry”? This is where ASTM International comes into play.

Since there is no real standard on what constituted all appropriate inquiry, a standard was defined in the early 1990s on what constitutes good commercial and customary practice for all appropriate inquiries for commercial real estate transactions.  A defined standard procedure to be followed for the all appropriate inquiry (AAI) procedure was developed. That process, embodied in ASTM standard E1527-13, is what we call a Phase I Environmental Site Assessment.

In 2002, another law was signed known as the Small Business Liability Relief and Brownfields Revitalization Act (or the “Brownfields Amendment”) that amended some portions of CERCLA. In particular, Title II, Subtitle B of the Brownfields Amendment added two new defenses to CERCLA liability, as well as mandating the Federal USEPA to develop standards and practices for AAI, which formally recognized ASTM E1527 as the applicable standard to meet the AAI requirement.

These two new defenses are:

The Contiguous Property Owner Defense

For those who have no knowledge of contamination of an adjoining property at the time of acquisition which in turn contaminates their own property.

The Bona Fide Prospective Purchaser Defense

For those who knowingly buy a contaminated site after January 11, 2002 (usually for the purposes of brownfields redevelopment).

Limited Liability Protection

In addition to the existing Innocent Landowner Defense. That makes three defenses, which collectively we call the “Landowner Liability Protections” (LLPs).  Again, these are the Innocent Landowner Defense, the Continuous Property Owner Defense, and the Bona Fide Prospective Purchaser Defense.

But remember, those LLPs are only possible if:

  • An All Appropriate Inquiry (a Phase I) was administered at the time of acquisition;
  • The acquiring party has no affiliation with the party responsible for the contamination; and,
  • The responsible party did not cause, contribute, or consent to the release(s) which caused the contamination.

If you have met all those three, you’re probably safe from being responsible for any cleanup. But again, this is not legal advice and you must check with a lawyer to confirm anything we’ve discussed here or on this website.

Ok, So back to the question:  Do I need a Phase I Environmental Site Assessment?

If someone is saying you need a Phase I Report to proceed, like a bank or a lawyer, then in that particular deal, yes, you’ll need a Phase I ESA.

If you’re buying a property from someone else, or inherit a property, or for any reason you’re about to have your name and/or company associated with a piece of property, you may not need a Phase I.  There is no law or requirement that says you must conduct a Phase I.   If you’re buying a property for cash then you technically don’t need a Phase I.

But if you buy a property without a Phase I, you buy the whole property including any liabilities later found on the property.  You own them – you are responsible for the contamination.  If it turns out there’s a 40-year-old leaking underground oil storage tank buried under the building, it’s completely your responsibility.

Without a Phase I, you have no defense. No protection from liability.  If problems are found that occurred prior to you purchasing the property, like leaking tanks, groundwater contamination, soil contamination, or whatever, you’re going to be responsible for the cleanup. Even if you aren’t the cause of it.

If you had obtained a Phase I, you’re probably not be held responsible (again, not legal advice) if contamination is found after acquisition that occurred prior to purchase.  Anything after-acquisition, of course, is your fault and is your responsibility to clean up.  And remember, the Phase I ESA has to obey the standards, all of them, of the ASTM E1527 standard and be performed by an Environmental Professional.

You’d be unwise not to obtain a Phase I ESA.  Many people want to know the cost of a Phase I Environmental Site Assessment, we think you’ll find that getting a Phase I ESA is much, much cheaper than any remediation or clean-up, or legal fees.

However, if you’re purchasing a parcel of land in the middle of nowhere that’s never been developed, and the surrounding area’s never been developed, you could be safe without a Phase I ESA.  But can you be sure no farmer dumped motor oil in the ground? Is a part of your property a typical place for people to dump trash – where no one can see it?  Was it ever used to store hazardous chemicals or petroleum products in the past?  You can never be too sure and it just makes sense to cover your risks by getting a Phase I ESA.

You need a Phase I ESA to protect your investment.

There are other reasons for a Phase I ESA, many good reasons. For instance, someone acquiring the property may want to manage Business Environmental Risk and not get involved with contaminated properties in any way what so ever.  Property buyers may want to establish a baseline of what came before them in case something does arise down the road.  All good, valid reasons for having a Phase I ESA Report done.

But to most experts, it’s the CERCLA liability protection, and qualifying for one of the three Limited Liability Protections (LLPs) if you have a Phase I ESA completed, and you are found to qualify.  If you ignore it or have a sub-standard Phase I done, you likely don’t qualify for those protections against liability.  Then you may end up paying for someone else’s problem.

Experts say it’s the best insurance you can buy.  Recognize that a few thousand dollars spent on a Phase I ESA Report might save you millions in cleanup costs, attorney fees, environmental damage costs, and more.   We’ve heard of commercial and industrial deals for hundreds of thousands to millions of dollars, and companies didn’t want to spend a few thousand bucks on a Phase I Assessment.  That’s not sound business practice.  It’s not smart no matter how you look at it.

Think about what you do when you buy a car.  Do you believe everything the previous owners or the used car salesman tells you?  Do you buy the car before checking the CarFax?   When you buy the car as-is, you might be buying a hunk of junk that doesn’t run!  It is just smart to want some basic insurance that your investment isn’t going to cost you a fortune later on.

Apply that same logic to a Phase I ESA.  Of course, it could cost you a few thousand bucks, but you’ll know you’re safe in the long run.

So do you need a Phase I ESA?
a) If a bank or lawyer says you do, then you do.
b) If you want protection from astonishingly expensive environmental cleanups, then yes, you also do.
c) If you want to gamble with your investment, then no, you don’t need a Phase I ESA.

If you want to chat personally about getting a Phase I, we’d love to help you. We work with people all the time on Phase I projects, whether they’re new to the topic, or seasoned experts.  Moreover, we work with many banks and lending institutions so we know the ropes.   Feel free to click here to contact us online.

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