Phase I Environmental Site Assessment

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

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.

According to the ASTM E-1527 standard: "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.”

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.

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?

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.

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.

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.

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.

ASTM International, formerly known as American Society for Testing and Materials, is an international standards organization that develops and publishes voluntary consensus technical standards for a wide range of materials, products, systems, and services.