As part of due diligence for most commercial real estate transactions a Phase I Environmental Site Assessment (Phase I ESA) is required by most lenders. The Phase I is used to identify any Recognized Environmental Conditions (REC’s) by determining if there are any historical or current environmental concerns which could have impacted the site. The Phase I can identify concerns dating back to as early as the late 1800’s when records of site usage were first documented. The identification of an REC leads to the recommendation of a Phase II Environmental Site Assessment (Phase II ESA). Some of the most common REC’s are historical gas stations, dry cleaners, and industrial uses just to name a few.
A Phase II recommendation should not be a deal breaking experience. This assessment typically involves conducting a subsurface investigation and collecting soil and groundwater samples which are then analyzed for possible contaminants.
A Phase II recommendation does not come lightly but is founded on protecting commercial real estate lenders and investors from potential risks that could be associated with a property due to the potential for current or historical chemical impact. There is a good possibility that a Phase II investigation will find that there are “no” chemical impacts or that chemical impacts have degraded to the point the impacts are ‘below regulatory levels’ and may not hinder the real-estate transaction.
The Phase II assessment is a necessary tool to address RECs identified in a Phase I. You can never be certain about a property’s historical uses unless, as an example, the historical property use has been limited to residential development or if the property has never been developed and there is no evidence of illegal dumping, etc. A Phase II recommendation is always appropriate to ensure that the target property has not been negatively affected by the identified REC(s).
A Phase II can sometimes come at a price but more often than not, it is money well spent. The fact is, most investors will sell their property at some point in the future and that can be an unfortunate time to find out you own a contaminated property. Keep in mind most lenders or investors will have their own Phase I conducted before lending on or purchasing a property and their environmental consultant will have access to the same information you were presented with during your Phase I assessment. The possibility exists that potential future investors will be conducting their own Phase II assessment.
A Phase II recommendation is not what most investors want to hear. However; it is part of the due diligence process required to protect our client’s potential investment and is always based on facts that interestingly enough are readily available at local library’s.
Kevin W. Almaguer, P.G.