One of the initial stages of buying or developing commercial real estate (CRE) is having a Phase I Environmental Site Assessment (ESA or Phase I ESA) conducted. This environmental study assesses any potential environmental issues at the site in order to reduce liability and risk exposure against environmental claims.
If you plan to invest in, buy, or develop CRE, learn what a Phase I Environmental Site Assessment is, when they are carried out, who conducts them, and how it can impact a property's value or construction or a real estate transaction.
What is a Phase I Environmental Site Assessment?
A Phase I Environmental Site Assessment is a site inspection that is conducted on commercial property and is used to determine the environmental condition of the property or land, based on past and future planned use.
The assessment report will identify whether there are signs or evidence of any hazardous environmental concerns, such as soil or groundwater contamination from hazardous materials, and determine whether underground storage tanks are present, in addition to potentially unsafe building materials such as asbestos.
When is a Phase I Environmental Site Assessment carried out?
Since the goal of a phase I study is to conduct environmental due diligence, it is ideally conducted before a property transfers ownership to help eliminate future liability claims for environmental contamination.
A Phase I Environmental Site Assessment is typically ordered when a commercial property or vacant land intended for commercial use is being sold and is carried out during the buyer's due diligence period. If the buyer is obtaining a bank loan, the lender will order the phase I environmental study after the loan has been sent to underwriting.
A phase I study will cost around $2,000 to $4,500, depending on the size of the property or complexity of the project.
Who conducts a Phase I Environmental Site Assessment?
The United States Environmental Protection Agency (USEPA) has established standards for a Phase I Environmental Site Assessment and requires a certified inspector to conduct the inspection. An inspector will visit the site in order to:
- Review the title.
- Review property boundaries and maps and obtain aerial photos.
- Search for environmental liens.
- Research past property or land use.
- Research previous permits and plan records.
- Interview the current property owner or neighboring property owners.
How a Phase I Environmental Site Assessment affects real estate and construction evaluations
If hazardous issues are discovered as part of the phase I environmental study, the lender or buyer can have a Phase II Environmental Site Assessment conducted, which will further test soil, water, and air contamination by taking samples, among other tests like soil boring or well monitoring. This will confirm evidence of contamination, and if required, further testing will be conducted in a Phase III ESA, which will identify the severity of the issue and proper remediation measures.
After the Phase I or Phase II ESA is returned, it's at the buyer or lender's discretion whether to move forward, renegotiate, request remediation, or withdraw their offer based on the findings. Most lenders will not lend on a property with severe environmental concerns because of liability. It puts the development project at risk because the construction or operation of the business may be halted until the issue is remediated, retested, and approved by the proper environmental consultants, which can be both costly and time consuming.
In most cases, severe hazardous contamination will lower a property's value, even after remediation, because of the risk and liability exposure for the buyer. For this reason, all commercial buyers and sellers should have an environmental study completed during a sale, even if it's not required by a lender. Completing environmental due diligence provides liability protection from a contamination claim and can shift responsibility to the rightful property owner.