The Phase I Environmental Site Assessment

May 1, 2001

7 Min Read
The Phase I Environmental Site Assessment

The Phase I Environmental Site Assessment

An overview of the process, its components, timing and pricing

By Douglas A. Olson, P.E.

Hasyour lender required you to have a Phase I environmental site assessment (ESA)conducted on your self-storage facility? Are you are thinking about conductingan ESA on a property you might like to acquire? This article will provide youwith a general overview of environmental due diligence, the components of an ESA,the ESA process, and general pricing and timing.

The reason typically given for conducting a Phase I ESA is the potentialproperty-owner liability created by the Comprehensive Environmental Response,Compensation and Liability Act (CERCLA), also known as "Superfund."CERCLA liability for the cleanup of hazardous substances lies with the currentproperty owner unless, at the time of acquisition, he did not believe--or haveany reason to believe--that hazardous substances had been or may have beenreleased on the property. In order to safeguard himself from CERCLA liability, aproperty owner must establish the defense that he had no reason to know of anactual or threatened release of a hazardous substance on his property. To dothis, CERCLA requires he undertake, at the time of acquisition, "allappropriate inquiry into the previous ownership and uses of the propertyconsistent with good commercial practice in an effort to minimizeliability."

Obviously,lenders do not want to loan on an environmentally impaired property due toliability under CERCLA as it may effect their exit; however, there areadditional reasons to conduct ESAs. For example, CERCLA excludes petroleumproducts and asbestos, often the most common causes of environmentalcontamination. There may also be potential environmental liability on a state orlocal level. A mandated environmental cleanup by a government agency will likelyimpact your self-storage income stream, which may be tight to start with.Moreover, contamination identified during site development can substantiallyincrease your hard and soft construction costs. Finally, on-site contaminationcan significantly impact or negate your exit strategy.

The ASTM Standard Industry Practice

Initially,there were no established standards for conducting Phase I ESAs. Many banks,insurance companies, governmental agencies, REITs, etc., had their own uniqueprotocols for conducting such assessments. But varying levels of inquiry andformats made comparison of reports difficult; Phase I assessments would varyfrom a single-page letter report for $250 to and in-depth study costingthousands of dollars. In order to provide a level of consistency, the AmericanSociety for Testing and Materials (ASTM) created industrywide standards in 1989.

The result of the ASTM's efforts was the creation of E 1527 (Phase IStandard) and E 1528 (Property Transaction Screening). These standards meet therequirements of "appropriate inquiry" established under CERCLA and arenow considered the industry standard and good, customary practice. However,there are potential items of environmental concern that are not addressed underthe ASTM Standard.

Ananalysis or discussion of wetlands, which may impact the amount of your sitethat can be developed, is not required under the ASTM standards. Moreover,asbestos and lead-based paint, items of potential environmental concern that maysignificantly impact construction costs of a building's conversion toself-storage, are not addressed by the ASTM standards. You should establish thescope of the Phase I with your environmental consultant. Often, this will resultin conducting a Phase I in accordance with ASTM Standard E 1527 enhanced for ananalysis of wetlands, asbestos-containing materials and lead-based paint.

The Phase I ESA Process E 1527-00

Thepurpose of the Phase I standard is to identify recognized environmentalconditions in connection with a property using the methodology recommended bythe ASTM. The objective is for the property owner to qualify for theinnocent-landowner defense against CERCLA liability, or to help understandpotential environmental conditions that could materially impact the operation ofthe business associated with the property.

Recognized environmental conditions are defined by ASTM Standard E 1527-00as: the presence or likely presence of any hazardous substances or petroleumproducts on property under conditions that indicated an existing release, a pastrelease or a material threat of a release of any hazardous substances orpetroleum products into structures on the property or into the ground, groundwater or surface water of the property. The term includes hazardous substancesor petroleum products even under conditions in compliance with laws. The term isnot intended to include de minimis conditions that generally do not present amaterial risk of harm to public health or the environment and that generallywould not be the subject of an enforcement action if brought to the attention ofappropriate governmental agencies.

The ESA process essentially consists of four components: records review, sitevisit, interviews and report preparation:

Records Review
The records review consists of the reviewing of records maintained incertain governmental regulatory databases, and the review of historic,topographic and hydrogeologic information. The governmental-database reviewincludes the review of federal and state regulatory databases such as lists ofleaking, underground storage tanks. The lists are reviewed to determine whetherthe subject property--or surrounding properties within a defined distance of thesubject property--has known environmental conditions such as a leaking,underground storage tank.

The history of the site is analyzed to determine whether former site usage orthe historic usage of nearby properties have resulted in environmentaldegradation of the site. Essentially, the ASTM Standard E 1527 requires thehistory of a site be determined back to the earliest of either 1940 or thesite's first developed use.

Site Visit
The site-visit portion of the process includes a site reconnaissance ofthe subject and nearby properties. The purpose is to characterize the on-siteconditions and obtain visual evidence of recognized environmental conditionsthat may impact the subject property.

Interviews are often overlooked, but are an integral part of the siteassessment. This portion of the process should not be "skimped on" aspeople knowledgeable of the site and/or its environs can be an invaluable sourceof information. Interviews should be held with current and former propertyowners, tenants, neighbors and local and state regulatory agencies. Theinterviews should be documented in the report along with the interviewee'stitle, affiliation and phone number.

The Report
Finally, the findings and conclusions are assembled with the supportingdocumentation in a report. Although providing recommendations is not required,the report should include recommendations and cost estimates. In any event, theinclusion of recommendations should be discussed with the environmentalconsultant at the start of the assignment.

The Transaction Screening E 1528-00

The transaction screening, ASTM Standard E 1528, is typically conducted onsmaller loans--usually those ranging in size from $250,000 to $1million--because the lender has less exposure. It is much easier to write-off a$500,000 loan than a $5million one. However, inasmuch as environmentalremediation costs are based on the size, level, type of contamination and themedia impacted, and not the purchase price of the property or the amount of themortgage, I do not recommend transaction screens for those taking any equityposition in of a property.

The transaction screening consists of three steps:

  • The completion of an ASTM-designed environmental questionnaire regarding current and past uses of the property and surrounding sites;

  • An inquiry and review of governmental records and specific historical sources pertaining to hazardous-waste activity on or near the property; and

  • A site reconnaissance and visual inspection.

Thechecklist or questionnaire is to be filled out by at least three parties,usually the owner, the occupant and the person conducting the assessment. Sincethe transaction screening is not as thorough as a Phase I ESA, the site willoften fail the transaction-screen process, resulting in a recommendation toconduct a full Phase I ESA.

Timing and Costs

Typically, the cost of a Phase I ESA ranges between $1,500 and $2,500 for astandard turnaround time depending on the location, size and complexity of thesite. Turnaround times range from two to three weeks, with three weeks being thenorm. Transaction screens range in price from $500 to $1,200, and can usually becompleted within one to two weeks.

When choosing a consultant, make sure his report will be acceptable to thelender, that he has at least $2 million in Errors and Omission insurance, and hehas the depth to follow up on any potential recognized environmental conditionshe identifies.

Douglas A. Olson, P.E., manages the Phase I environmental site-assessmentdepartment at IVI Environmental Inc., a full-service environmental-engineeringfirm. IVI is a recognized firm headquartered in White Plains, N.Y., with branchoffices in Washington, D.C., Miami, Dallas and Los Angeles. The company, whichhas extensive experience with investment banks, the CMBS market and ratingagencies, conducts more than 1,200 Phase Is per year on behalf of developers,owners, buyers, lenders and insurance companies. In addition, IVI's Phase II andPhase III departments and asbestos department conduct investigations, andremediations and abatements throughout the United States. Mr. Douglas can bereached at 914.694.9600; e-mail [email protected].

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