What is a “Phase I” and Do I Need One?

When purchasing any commercial property, it is important to know the history of that property and find out if there might be contamination that could affect future plans or occupants of the property.  In order to thoroughly evaluate a property and protect a new owner from liability for existing contamination, it is important to conduct what is called a “Phase 1 Environmental Site Assessment (ESA)”.

A Phase 1 ESA is conducted by an Environmental Professional, often an engineer or geologist.  The American Society for Testing and Materials (ASTM) developed Standard E1527-13 as the criteria that should be followed for a Phase 1 ESA.  The objective of the standard is to make sure a Buyer has conducted All Appropriate Inquiries (AAI) on a property, which must be performed to obtain certain protections from liability under federal laws.

The Phase 1 report does not include any soil testing, but instead, it examines the historical use of a property.  It is an information gathering report that is designed to identify potential environmental contamination.  It will include:

• A history of past uses of the property and surrounding lands.
• Interviews with the current owners and past users of the property.
• A site visit to identify contaminants used around the site that may affect soils or groundwater.
• A historical and visual search of above ground or buried tanks used on the property.
• A database search of neighboring properties that may have adversely affected the subject property.

This data will be used to determine if there are any Recognized Environmental Conditions (RECs) on the property.  If there are none, the buyer is then protected from liability under the federal CERCLA laws by having this report.

A REC could be a floor drain in a building where solvents and petroleum products are used, which might drain to a septic field and infiltrate the groundwater.  It could be an area of dead vegetation outside the back door where chemicals may have been disposed of improperly.  Other common RECs include evidence of old gas or oil storage tanks on the property, chemical storage, paint, old transformers, landfills and more. If RECs are identified, then a Phase 2 will most likely be needed.

A Phase 2 is where the Environmental Consultant will do testing of soils, groundwater, vapor gases and/or a host of other tests, to determine if there are pollutants on the property that may cause a future issue.  If these reports come back negative, or with small amounts of contamination lower than a certain safety threshold, the buyer is then protected from liability and does not need to complete additional reports.

If there are contaminants on a property, a buyer is not obligated to clean up the site, but they must make sure they do not exacerbate the contamination.   To protect themselves from liability, they will need to have their consultant write a Baseline Environmental Assessment (BEA) stating what contamination exists on the property, and a Due Care Plan stating how they will take steps to ensure they do not make the situation worse.  Sometimes a developer plans to go down into the soil for footings or a basement of a new building and there will be a great cost to removing contaminated soils.  Other times, the developer may just need to put a vapor barrier between the earth and slab and the added cost is minimal compared to the cost of the whole project.  For existing buildings, a buyer may just need to show that they do not plan to continue the same use and do not use the same types of chemicals that are on the site, and then there is nothing further they need to do.  There are many different situations that can arise, and it is important the buyer fully understands their responsibility and expenditures.

It is also important to note that new Tenants in a building may have some liability if they are using certain products (ie petroleum products, paints, solvents, etc.) that may have been used on the site in the past.  It would be advisable for any industrial user, dry cleaner, gas station or similar type of tenant to get a Phase 1 before leasing a building.  It is also important to note that a Phase 1 does not cover every type of environmental condition and if an old structure is being removed from a property the buyer should also have an asbestos and lead-based paint survey performed.

A Phase 1 will typically cost between $1,500-$2,500.  Most often, we see the buyer pay for the cost of the Phase 1, since it is giving protection to the buyer of the property, however, the cost is fully negotiable in the sales contract.  If a Phase 2 is recommended, then we are more likely to see the seller share some of the cost of the Phase 2 and/or BEA & due care plan with the buyer.  The cost of a Phase 2 will vary greatly depending on the scope of work that needs to be performed.  So, do you need to perform a Phase 1 when buying a property?  If liability protection is important to you, yes!  If you have a high-risk property such as an industrial building or land in a highly developed urban area, it would be advisable.  When buying a low-risk property, such as an office building, apartment complex or vacant land that has never been developed, you might consider a transaction screen ESA which is a limited report and less expensive, however, it will not provide the same federal liability protection.

Dan Stiebel, CCIM