What is a Phase I Environmental Site Assessment (ESA)?

The Phase I ESA is a review of relevant historic information and a non-intrusive assessment of existing site conditions. The Phase I ESA is generally conducted in accordance with the “Standard Practice for Environmental Assessments: Phase I Environmental Site Assessment Process” (ASTM E1527-05 (E1527)). The E1527-05 standard is often supplemented by lender guidance and requirements (e.g. U.S. SBA, HUD). As of November 6, 2013 the new version (E1527-13) has been released but not officially adopted by USEPA to meet “all appropriate inquiry” rule.

What is the goal of conducting a Phase I Environmental Site Assessment (ESA)?

The E1527 standard says: “the goal of the processes established by this practice is to identify recognized environmental conditions.”

What is the purpose of a Phase I Environmental Site Assessment (ESA)?

Generally, the Phase I ESA has two purposes:

  • to provide environmental liability protection for a prospective purchase
  • to conduct environmental risk management (ERM) for a lender, investor or purchaser

For lenders, meeting the ERM guidance (i.e. environmental policy) is required to close the loan in compliance with policy and applicable regulatory guidance, including the recently released OCC manual (August 2013). The Phase I ESA is typically the first step in the Environmental Due Diligence (EDD) process which can include: Phase I ESA, Phase II ESA, Phase III ESA (remediation), continuing obligations/due care and baseline environmental assessment (BEA)(Michigan-only).

For mergers & acquisition (M&A) transactions the structure of the EDD process should be structured to complement the transaction structure.

What do I get as far as output from a Phase I ESA?

A Phase I ESA conducted per E1527 will indicate whether environmental issues, in ASTM-speak: recognized environmental conditions (RECs), are identified or not. The ASTM standard requires specific language to be used whether RECs are identified or not.

What is a “recognized environmental condition” (REC)?

Again, the “old” ASTM standard (E1527-05 subsection 3.2.74) provides the following definition of a “REC” as:

“The presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release, or a material threat of a release of any hazardous substances or petroleum products into structures, on the property or into the ground, groundwater, or surface water of the property. The term includes hazardous substances or petroleum products even under conditions in compliance with laws. The term is not intended to include de minimis conditions that generally do not present a material risk of harm to public health or the environment and that generally would not be the subject of an enforcement action if brought to the attention of appropriate governmental agencies. Conditions determined to be de minimis are not recognized environmental conditions.”

The new ASTM standard (E1527-13 subsection 3.2.78) provides a more succinct definition:

“The presence or likely presence of any hazardous substances or petroleum products in, on, or at a property: (1) due to release to the environment; (2) under conditions indicative of a release to the environment; or (3) under conditions that pose a material threat of a future release to the environment. De minimis conditions are not recognized environmental conditions.”

Methods to screen for RECs per ASTM definition?

First, it is not the end of the world if a REC is identified. The identification of a REC does not mean the property is contaminated. Environmental issues and RECs can be addressed in a number of ways structured to meet the goals of the involved parties. Here are some thoughts to consider when assessing a REC:

  • Does the property meet the definition of commercial real estate as defined in standard?
  • Have hazardous substances1 or petroleum products been used at the property? Currently? Historically?
  • Is the historic property use consistent with hazardous substance use that could have resulted in a release?
  • Is the current property use consistent with hazardous substance use that could have resulted in a release?

1 The term “hazardous substances” includes all the substances listed on CERCLA’s “List of Lists”. In Michigan, that list is supplemented by the substances listed in the Part 201 cleanup tables.

What happens if a REC is identified?

Here are some thoughts to consider when purchasers, sellers, lenders and investors assess RECs:

  • Does the REC really meet the definition?
  • Is the REC material to the underlying purpose for conducting the Phase I ESA?
  • Will additional information clarify the issue and “mitigate” the REC?
  • Can the transaction be structured to parse out the environmental issues?
  • Is sampling (i.e. Phase II ESA) necessary to the transaction or reliance on liability protections (e.g. AAI)?
  • Can an Environmental Cost Estimate (ECE) be used to quantify the potential environmental cost/exposure? If so, is additional information/date necessary to prepare the ECE?
  • Do all of the RECs need to be investigated?
Does a Phase I ESA with no RECs identified mean the site is “clean”?

No, it does not. It does mean that, based on the data developed during that Phase I ESA, that the specific consultant did not identify conditions consistent with a REC (see: definition above). Care should be taken in reliance on “clean” Phase I ESAs, especially when there is evidence of historical use of hazardous substances at the property.

What are some of the most common RECs?

A list of common RECs include1:

  • Landfills and open dumping sites, including “social dumps,” uncontrolled or unpermitted landfills, construction and demolition debris disposal areas, and illegal waste storage and disposal sites
  • Agricultural and ranching-related uses (e.g., pesticide mixing and storage sites, livestock dip vats and pesticide applicator sites, and herbicide/insecticide application areas)
  • Commercial properties associated with service industries (e.g., service stations and fuel distributors, underground storage tanks, above-ground storage tanks, vehicle/equipment maintenance and repair shops, oil-water separators and salvage yards) (reference: SBA Environmentally Sensitive Industry list)
  • Food and animal feed processing plants
  • Manufacturing (especially light industry)
  • Mining areas (metal, coal, and industrial mineral mines where issues such as subsidence from underground workings, tailings, waste rock dumps, mill and smelter wastes, and acid mine discharge can occur)
  • Oil and gas fields and oil and gas transmission and processing facilities
  • Military land uses (e.g., munitions and explosives of concern)
  • Electrical transmission and distribution infrastructure (e.g., PCB transformers or former transformer sites)
  • Wood preservative treatment sites and sawmills

1 Source: Chapter 6, AWEA Siting Handbook, 2008.

What is a Phase II ESA?

A Phase II ESA is conducted with the goal of addressing the RECs identified in the Phase I ESA. The Phase II ESA commonly includes the collection of samples of various media (e.g., soil, groundwater) to document site conditions. Other activities that may be conducted during a Phase II ESA include further data gathering, geophysical assessment, sediment sampling, and test pits.

What is the cost of a Phase II ESA?

The scope of work for a Phase II ESA is highly site-specific to investigate and assess the RECs, all or some, identified in the Phase I ESA. The number, depth and soil stratigraphy of boreholes is a key driver of Phase II ESA cost. The other key cost driver is the type of laboratory analysis and the number of samples. The range of Phase II ESA costs is $2,000 on the low end with $12,000 on the upper end. The common range of Phase II ESA costs is $4,000 to $8,000. The lender policy may also drive specific additional tasks resulting in potential additional cost.

In a real estate transaction how are the environmental costs shared between seller and purchaser?

The purchaser is the party that is required to complete the environmental work to be able to rely on the landowner liability protections (LLPs) available under federal and state regulation. The Phase I ESA is most often paid entirely by the purchaser. The cost sharing for Phase II ESAs ranges from 0 to 100%. In most cases the purchaser pays the entire cost of the EDD.

How does a consultant screen a property historic use to identify a REC?

A Phase I ESA developed to meet the AAI requires the owner to conduct “all appropriate inquiry” into the previous ownership and uses of the property. The most common tools to identify the historic property use include: fire insurance maps, city directories, aerial photographs, plat maps and topographic maps

Once the historic property use is identified this use will be screened, supported by other site information (e.g. aerial photographs, city directories, fire insurance maps) to assess for the evidence of a release of a hazardous substance or petroleum product. The U.S. Small Business Administration (SBA) “environmentally sensitive industry” (ESI) list is often used to screen these historic property uses for identification of RECs.

Can former tenants or owners be tracked down to assess their operations and potential responsibility?

Although former tenants or owners can be tracked down to further identify their operations and/or responsibility, such work is well beyond the scope of a Phase I ESA and is more commonly associated with allocation issues in lawsuits.

Once the historic property use is identified this use will be screened, supported by other site information (e.g. aerial photographs, city directories, fire insurance maps) to assess for the evidence of a release of a hazardous substance or petroleum product. The U.S. Small Business Administration (SBA) “environmentally sensitive industry” (ESI) list is often used to screen these historic property uses for identification of RECs.


Click here to view the SBA SOP 50 10 5(D) NAICS Codes of Environmentally Sensitive Industries.