Environmental Due Diligence Requirements for Property Purchase

A Phase I Environmental Site Assessment (Phase I ESA) conducted in accordance with the American Society for Testing and Materials (ASTM) standard practice for environmental site assessments (Designation: E 1527-05) is the nationwide environmental due diligence standard when a prospective buyer is considering the purchase of a commercial or industrial property. A Phase I ESA is required by most lending institutions prior to the approval of a commercial or industrial property loan to indentify environmental conditions at the property that may adversely affect the property value. Completion of a Phase I ESA on a prospective property provides a property buyer “innocent purchaser” protection under Federal law. Some States have additional due diligence requirements that provide a property buyer “innocent purchaser” protection under State law.

A typical Phase I ESA costs between $2,500 and $3,000 for a three to four week turnaround. The purpose of a Phase I ESA is to develop a historical understanding of potential environmental impacts that may have occurred at a property and to identify potential environmental hazards on a property, which are known as Recognized Environmental Conditions (RECs). Environmental impacts and hazards are identified and quantified to evaluate their impact on the value of a property. Lenders do not want to provide a loan for a property that has environmental liabilities that are in excess of the value of the property, since the lender could potentially gain ownership of the property, if the borrower goes into default on the loan. To protect their interests, lenders often have their own Phase I ESA requirements that go beyond what ASTM Designation: E 1527-05 requires for environmental due diligence. Lender requirements include environmental concerns that are not required to be investigated per ASTM Designation: E 1527-05, such as: asbestos, mold, lead-based paint, lead in drinking water wetlands, radon, vapor intrusion, and indoor air quality.

A Phase I ESA consists of: a site inspection at the property under consideration by a qualified Environmental Professional, interviews with knowledgeable parties, a search of federal and state environmental databases, a review of the current United States Geological Survey map, a review of historical aerial photographs, a review of property tax files, a review of Sanborn Fire Insurance Maps, and a local records search at the municipal offices that could contain files regarding the property. The findings of a Phase I ESA are presented in a report prepared and signed off by Environmental Professionals, whom are qualified to perform environmental due diligence. A Phase I ESA report includes a detailed property description, details regarding the findings of the Phase I ESA, and a section that outlines the opinions and conclusions of the Environmental Professional that performed the Phase I ESA. The opinions and conclusions section outlines the RECs that were found at a Property and provides recommendations for additional environmental due diligence regarding the RECs, if necessary.

Additional environmental due diligence that implements the recommendations provided in a Phase I ESA report would typically include a Phase II Site Investigation (subsurface investigation), which would involve the installation of soil borings or temporary ground water monitoring well points to investigate RECs that may have impacted soil or ground water at the property and other environmental investigation, as necessary, based on the types of RECs indentified. A less expensive and faster alternative to a Phase I ESA is a Transaction Screen, which is performed in accordance with ASTM E1528-06, “Standard Practice for Limited Environmental Due Diligence: Process.” A Transaction Screen is suitable for property transactions in which no lender is involved and the prospective buyer would like to perform limited due diligence to ensure that they have some understanding of environmental conditions at the property prior to finalizing the purchase of a property. A Transaction Screen can also be utilized when a property lease or refinancing is being pursued, and an update of the environmental condition at the property is needed. A typical Transaction Screen can be completed in two weeks and costs less than $1,000.

Another popular alternative to a comprehensive Phase I ESA is a search of the environmental databases that are used to prepare a Phase I ESA. Database searches are often utilized by prospective property buyers that are in the early stages of due diligence concerning a property they are interested in buying. They provide a limited but useful amount of information about the environmental condition of a property under consideration and the area surrounding the property. A typical search of the environmental databases can be completed in as little as one week, and costs $700 for the database searches and a review letter that provides a professional review of the findings. This option can be customized to suit a client’s due diligence needs, including a site visit and/or file review to gain a greater understanding of a property under consideration for purchase. The information obtained during the preliminary due diligence efforts can be included in a Phase I ESA, should one be necessary at a future point during the property purchase transaction.

• To Request Environmental Due Diligence for a Pending Real Estate Transaction See: Environmental Due Diligence for Property Transactions
  
• For Financial Due Diligence See: Why Financial Due Diligence Is Key In A Real Estate Acquisition