Phase I ESA Peer Reviews
It is a professional review of the ESA report to confirm that they meet industry benchmarks for pre-acquisition due diligence. In short, it is a peer review to see if the research that is crucial to the Phase I was properly interpreted and if there are necessary next steps to complete, aka a Phase II, which is testing. A peer review is typically done when a Phase I is brought to a transaction, and it is completed by a third party not associated with the buyer or lender.
AKA ESA, or Phase I ESA, is completed to research potential environmental liabilities regarding the current and historical uses of a property as part of a commercial real estate transaction. The report is meant to assess if current or historical property uses may have impacted the soil or groundwater beneath the property, and whether the property has an environmental liability that the owner would be responsible for. The lender is subject to the potential liability if the mortgagee defaults.
It is safe to say most commercial properties should and do undergo a Phase I ESA prior to settlement. But some transactions fall apart, and new buyers swoop in and utilize the prior buyers' Phase I. This practice is fraught with issues. Relying on a Phase I you do not own is subject to liability. Now you can obtain a reliance letter, so you have rights to the report, but how accurate is the report? That is when a Phase I Peer Review is performed.
A Peer Review will 100% of the time be completed at a desk, but some reports are so thin and loose on quality, a site walk is also necessary. Case in point, the photo to the left.
This photo shows a sale involved at a heavy equipment repair facility. The Phase I report lacked clear detail on the work area where petroleum fluids would be encountered, and, from experience, this was too big a data gap, so a site visit was also necessary. The photo was just one of many areas where staining was evident, the concrete floor was not intact (heavy equipment weighs a lot and concrete cracks), and yes, testing was required, and remediation was necessary.
Curren completes thousands of Phase I peer reviews every year, and the quality varies widely. Inexperienced people miss issues that should be noted and investigated. Unfortunately, some of these reviews are completed years later, and anything that was missed is well past any recourse. Not as bad as it is when the Peer review is performed before settlement, and something was indeed missed that requires further evaluation, which means several weeks of delay in settlement.
Let me discuss two real-world scenarios. A seller gave a buyer their Phase I, which they used to purchase a property through a 1030 exchange. Years later, the property is being sold, the prior Phase I is too old to use, and a new buyer completes a Phase I and Phase II, which leads to $64,000 of environmental cleanup that was associated with prior, not current, uses. In short, in Phase I, the buyer, now seller, relied upon missed issues.
Have due diligence questions?