August Mack Newsletter | July, 2018

Face to Face with Phase I and Phase II ESA's

The Phase I Environmental Site Assessment (Phase I ESA) and Phase II Environmental Site Assessment (Phase II ESA) are very common reports used to identify potential or existing environmental contamination liabilities for real estate transactions.  These reports can provide important information about a property, but can also be overlooked as simply a check box on long list of items required to complete prior to closing a real estate transaction. 

What’s the big deal about Phase I ESA?

The Phase I ESA wasn’t dreamt up as a way to add more closing costs to a transaction.  Creation of today’s Phase I ESA was largely a result of the U.S. courts passing the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA).  Implementation of CERCLA established, among other things, a liability scheme for determining who can be held accountable for releases of hazardous substances.  Under CERCLA, any property owner of a site from which there is a release or threatened release of hazardous substances, regardless of fault, can be held liable – simply by virtue of ownership.  CERCLA provides protection from liability for certain parties, provided they comply with specific criteria outlined in the statute.  Three common protections under this statute include: 1) Innocent landowners, 2) Contiguous property owners, and 3) Bona fide prospective purchasers. 

To qualify for these protections, “All Appropriate Inquiry” (AAI) must be completed to determine prior uses of the property and to identify past releases or potential releases of hazardous substances at the property.  The Phase I ESA became the standard by which parties eligible for protection under CERCLA could satisfy the AAI requirement set forth in AAI 40 CFR part 312.  In 1993 the American Society for Testing and Materials (ASTM) published a baseline process for completing AAI.  This standard, the ASTM E 1527, Practice for Phase I Environmental Site Assessment, is still in effect today and has undergone several updates and revisions to comply with AAI regulations. 

What does “REC” mean?

The findings of the environmental consultant may uncover a recognized environmental concern (REC), which may lead to further investigation. Examples of RECs may include but are not limited to: discovery of a spill or staining, evidence of a leaking underground storage tank, finding releases from adjacent properties, among other issues.  Upon discovery of REC’s, the environmental professional may recommend a Phase II Environmental Site Assessment (Phase II ESA). 

What does a Phase II do that a Phase I can’t?

The degree to which a site is inspected is the main difference between a Phase I and Phase II ESA.  While the Phase I ESA is used to identify potential REC’s, the Phase II further investigates the presence/absence or further identifies/quantifies the potential environmental contaminants recognized in the Phase I.  A Phase I is noninvasive, whereas Phase II is invasive - typically requiring collection and testing of soil or groundwater samples or building materials. Phase II site assessment allows the potential purchaser to gain additional knowledge of the environmental impacts of the property they are considering purchasing. 

While not required by law, having a Phase I ESA conducted is oftentimes required by an involved party (investor, lending institution, etc).  Environmental contamination on a site or adjacent site can impact the property value – cleanup of contamination can be a simple fix to a complex or costly solution.  Finding out as much about a property’s history and current condition can be an invaluable resource – and Phase I and Phase II Environmental Site Assessments can shed light on an important piece of the puzzle. 

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