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Do not misuse the term Phase I

A Phase I ESA (Environmental Site Assessment) is historical research on a property, typically commercial that looks for potential environmental impairment to the property.   No testing or remediation is performed in a Phase I.  A Phase II is all about testing and a Phase III is Remediation. 

The map below is of a long-since-developed site, that in the map was a train turnaround.  Trains are notorious for oil leaks and spills, surely a train turnaround such as this would hold legacy contamination that an unsuspecting property owner could be inheriting if they did not complete a Phase I.

Regarding testing, no Phase I is required to test, A Phase I identifies areas that could require testing.  Case in point, the photo below shows a storage tank on its side.   There is a concern because anything stored in the tank could have leaked out because the tank is on its side.  There would be a recommendation in a Phase I to test the soil around the tank.   But no testing is completed during the Phase I, that is left for Phase II.

You can't skip a Phase I and go to a Phase II as the Phase I is your road map of what to inspect. 

The most common misuse of the term Phase I is from residential home inspections.

We are commonly called to do an inspection of a property after a Home Inspection is performed.   It is not uncommon that the home inspector notices evidence of mold, or some other environmental hazard such as a former oil heat, and recommends further evaluation, which is prudent and warranted for sure.   But when a Phase I is recommended, it shows a clear misunderstanding of what a Phase I ESA actually is.

Here is an exert from such a report

"Underground Fuel Tanks Noted:
The evidence noted is the presence of either a fuel tank fill pipe or a fuel tank breather pipe at the referenced location. There is evidence of an underground fuel tank installed on the property. Further investigation is required to determine the condition of the tank as well as the presence of any leakage into the soil. A Phase 1 environmental audit of the subject property is recommended to determine the presence and/or condition of the underground oil tank and to see if other environmental hazards are present. The soil should be evaluated, and the tank should be pressure tested. Permanent removal of the underground storage tank should be considered. They do not leave fill pipes behind if the tank was removed. There is no evidence an oil tank was located in the basement.

A Phase I ESA follows ASTM protocol for historical research of a property, 99% of the time it’s performed on commercial not residential, unless multi-family.

A Phase I is meant to identify the potential for contamination of a site by hazardous or toxic materials and to identify other possible environmental constraints on the site. It is not meant to be a detailed, comprehensive investigation based on quantitative or qualitative analytical data. No environmental sampling and analysis will be performed under the Phase I scope of work. The form and content of this ESA I will follow the form and content as outlined in ASTM standard E 1527-21. The results of the Phase I ESA will be used to determine whether or not further study (such as a Phase II ESA) is warranted, based on the background information gathered and the results of the site inspection.

https://www.currenenvironmental.com/blog/why-a-phase-i-is-important

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A Phase I ESA is like your common screwdriver, a trusty, and dependable tool that most people know what it is used for, just like buyer due diligence, which is your insurance when buying a property.  A Phase I when completed properly provides protection under CERCLA, the Federal Superfund law, so Federal protection.

A Preliminary Assessment or "PA" is more like the tool in your workbench that you are not 100% sure what it is or how to use it.  New Jersey has its own innocent purchaser defense that requires a property owner to demonstrate that, at the time they acquired the property, they did not know and had no reason to know that any hazardous substance had been discharged at the property, by performing an “all appropriate inquiry” prior to purchase.  The PA provides NJ innocent landowner defense. 

A Phase I Environmental Site Assessment is meant to identify Recognized Environmental Conditions (REC)as defined by the American Society for Testing Materials (ASTM).   A Phase I report will include a comprehensive records review, interviews with knowledgeable parties, noninvasive walking inspection of the property, any data gap identification, an environmental lien search, and a comprehensive historical records review (think a 100 year lookback).

The current ASAT standard for a Phase I is E1527-21 which outlines how to assess the environmental condition of the Property utilizing the All Appropriate Inquiry (AAI). AAI is defined as an inquiry into the previous ownership and use of the Subject Property consistent with good commercial or customary practice as defined by CERCLA 42 U.S.C. §9601(35) (B). According to ASTM E1527-21, non-scope considerations that a consultant may want to assess in connection with commercial real estate and to which no implication is intended as to the relative importance of inquiry into such non-scope considerations consist of: asbestos-containing building materials; radon; lead-based paint; lead-in-drinking water; wetlands’ regulatory compliance; cultural and historic resources; industrial hygiene; health and safety; ecological resources; endangered species; indoor air quality; biological agents; and mold.

A Phase I includes zero testing but may find RECs that require testing.  The Phase I evaluates a property’s environmental condition and assess its potential liability for contamination. 

A Preliminary Assessment follows EPA guidelines not ASTM and is like a Phase I on steroids. The Preliminary Assessment will include an Order of Magnitude Analysis to ensure that previously generated environmental data is compliant with current regulations.  The PAR (Preliminary Assessment Report) is more detailed regarding both research and database research.  The Preliminary Assessment will look at historical manufacturing directories, deeper level of contamination identification, including recommendation(s) should the PA reveal any Areas of Concern (AOC) that require further investigation.  The more extensive environmental evaluation in a Preliminary Assessment entails a search/evaluation of the Site, specific to both current and historic operational and environmental information to determine if there have been any confirmed or potential releases or discharges.  A key part of this is an “Order of Magnitude” evaluation comparing past investigation results to current regulations and standards. Standards change and what may have been acceptable in the past can be out of compliance today.  Past environmental investigations can be found to be lacking and not compliant with today's standards, thus requiring further evaluation.  The additional layer of evaluation helps support a property owners NJ Innocent Purchaser Defense and, in some circumstances, can help acquire funding to remediate sites should contamination be found that was not identified in the report. 

Phase I  Preliminary Assessment Pro Tip 

In New Jersey, if you are opening a daycare or are subject to ISRA,  you need to complete PA, as NJDEP requires a PA not a Phase I.

Important facts about a Phase I vs a Preliminary Assessment

1.   A Phase I ESA is a screening tool to evaluate possible environmental liabilities at a property.   It is strictly lender level ASTM compliant research and data review for financial transactions. The party paying for the Phase I may choose to not investigate(test) any RECs from the Phase I.  A Preliminary Assessment covers state (NJ-specific) liability and is necessary to be in compliance with NJDEP's Technical Requirements for Site Remediation (N.J.A.C. 7:26E)  to obtain protection from potential liability as an innocent landowner (under the NJ Spill Compensation and Control Act N.J.S.A. 58:10-23.11) 

2.  The timing of a Phase I is 2 to 3 weeks.  A Preliminary Assessment takes longer and can  take 20-45 days, due to the additional research involved and you have to wait to receive File Review replies from local and state agencies.

 Can you combine a Phase I & Preliminary Assessment?

Curren has been working on PHIs for over 30 years and this has been a more recent trend in real estate sales.  Curren has been performing PHI/PAR reports for many clients with legal representation in the transaction.   

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Phase I is the foundation of due diligence when buying a property. Phase I environmental audits are so important for purchasers of commercial real estate. Environmental regulation places the burden of environmental cleanup on a property owner.  If contamination occurred at a property 40 years ago and 5 owners ago, regardless of who owned the property in the past, the current property owner is the Responsible Party for the cleanup. 

Short story, a professional firm, was closed over a weekend.  When employees returned on Monday, they found a 14,000-gallon tank in their parking lot.  The tank was dumped there over the weekend.  This dumping was reported to the police and security cameras caught the entire process, unfortunately, the cameras could not decipher the license plate.  The bottom line the property owner had to pay to properly dispose of the dumped tank. 

That said, how do you know you are getting the best Phase I?

The environmental company should express that the  Phase I can be completed within 3 weeks on average.   Longer time frames would occur if there are government records (environmental reports at the State) that must be reviewed which can take three (3) more weeks to access.  You, as the client, need to be told that Phase I may not be able to be completed as fast as you would like, which many environmental consultants do not want to address.

Quick Story

Environmental company out of Buffalo, NY, did a Phase I at a property in Southern, NJ for an SBA loan.  Timing was mission critical, Phase I report was completed but it had a large data gap, as their recommendation below states:

Recommendations
Additional investigation is warranted to assess the on-site subsurface conditions due to the potential for on-site USTs and long term automotive repair, and should include the area of the floor drain/sump discharge and former in-ground lifts. A review of the 2016 NJDEP Case may help reduce the scope of work. Nevertheless, if investigation identifies a concern, further investigation/remedial work may be required.

Reading between the lines here the consultant knew there were reports with NJDEP but did not review them as they had to complete the Phase I in a short time frame.  Fact, the Phase I was not complete and should not have been issued until the State files were reviewed. Now the consultant wants more money to review files that should have been reviewed as part of the Phase I.  This is very common and wrong on many levels.

Your takeaway should be that you have to be provided realistic time frames to complete the Phase I.

It is estimated 70% of Phase I's require some form of a Phase II.  Now understand that while a Phase I could be classified as white collar, a Phase II will include an aspect of blue-collar work.  Most environmental consultant do not staff people or equipment necessary to perform a Phase II.  Many Phase I customers end up getting hit with the markup from subcontractors that consultants utilize for the Phase I.  You also get wacked with dealing with a 3rd party schedule.

Quick Story

Curren completed a Phase I for a business and property being sold.  Phase I found contamination, buyers bought the site and one of the partners had a friend that worked at another environmental company, that took over the management of the contamination post purchase.  The rub was the friend's company, owned no equipment and subcontracted everything and they had fallen into and out of bankruptcy several years ago and had a long list of vendors they never paid.  Curren Environmental got called back to supply equipment for the investigation and remediation of the site, only Curren couldn't extend credit to the environmental company due to their prior bankruptcy.  The buyer had to pay for all our work which the partners questioned why they switched companies in the first place.  I think their biggest concern was the financial health of the company they hired.

The lesson here is hiring a company that covers tasks of Phase I, II & III, can make your project smoother.

3    Ask the consultant to Predict Your Future

• When you hire a company for environmental you want experience.   The more you know the better you are at evaluating  risk.
• Buying a farm = GPR for tanks, past farmer dumping and pesticide contamination.
• Buying a gas station = former tanks
• Buying a strip mall = any past tenants that could cause contamination?
• Industrial Land = What operated there? Manufacture companies and waste generation.
• Buying land to redevelop = Any off-site contamination concerns that could affect your development
• Known Contaminated Site = what has been done and how viable is owner of value of land vs contamination

If you give us the site address and some prior history, the crystal ball can go to work to prep you for what could be in store for you.    This is often bad news and potential negative issues that could affect the transaction, but topics that you should be aware of during your due diligence.  This may even deter you from proceeding with the purchase.

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What are appropriate Due Diligence time frames?

One of the most common issues in buying and selling real estate is unrealistic due diligence time frames & settlement dates.  Settlement dates that are set PRIOR to any due diligence being completed is the biggest failure. If you are involved in real estate and the due diligence finds an Area of Concern (AOC) or a Recognized Environmental Condition (REC) 80% of the time the settlement date needs to be pushed back.

Quick example, completed Phase I ESAs for a site in New Jersey and Pennsylvania, both found potential USTs. Both required a geophysical, at one of the sites the property owner of 29 years swore there were no tanks, but they had zero paperwork to support that statement. Fast forward three (3) tanks were found between the two sites. Now you have to get NJDEP & PADEP permits and register the regulated tanks, both sites took about 50 days to get government permits.

Understand that Due Diligence has Many Layers and steps.

Take for example a farm being purchased that required a Phase I ESA, the due diligence period was set for 30 days with settlement on the 31st day.   The concern of the parties was whether the Phase I could be completed in 30 days, 90% of the time it can be, for the record most Phase I's can be completed in 2 weeks, sometimes 3 weeks.    But the real issue is the parties left no time for a Phase II, if required, and most all farms would require some form of a Phase II and that's coming from 30 years of experience.  Even if you tell people testing is likely going to be recommended, no one listens and no one extends the due diligence period, but everyone gets upset when they have to change the settlement date. Sure the seller could have done their own Phase I & II prior to selling the property and saved time and headache, unfortunately, few sellers are that forward thinking.

Let’s say, a property has had remediation completed, and multiple areas on a property were remediated. We just had a site that fits that bill.   A Phase I is still completed to protect the buyer but the Phase I has to review state environmental reports that were submitted, which can take 4 weeks to get copies of reports.  (Fact most owners have incomplete reports or cannot find the reports).   Obtaining records from the government is not quick and yes a one (1) month wait is not uncommon.  The 4-week due diligence period must be extended.  

On the site we just dealt with, which was commercial, it was disclosed that multiple AOCs had been remediated and closed out with the state.  But this site had other areas that were not remediated that warranted testing, multiple, like $42,000 worth of testing.  Granted the property was 10.7 acres, listed for close to 3 million dollars, so it should not be surprising that AOCs existed on the property and were not evaluated by the seller, I mean few people who own real estate want to find a problem. The buyer still wanted to proceed with testing and purchase, and the seller did.  Well, the seller ended the contract, they were concerned problems would be found they would have to address.  Now, did the seller side warn them that this scenario was possible, hard to say but I would venture a guess the answer is no.  Is the seller wise in thinking another buyer will come along to buy the property without testing? They can hope but are unlikely.  The buyer was more than upset that a deal valued in the millions would be stopped in its tracks due to their desire to test and ensure they were not buying a contaminated property.  The buyer also was willing to contribute to some amount of remediation.  

But let’s say the deal kept moving forward and the seller gave another 30 days of due diligence.  The testing could be completed in this 30-day window, but if remediation was warranted, 30 days is not enough.   But the seller says we can price out cleanup and negotiate a price reduction within 30 days.   Still an epic unrealistic situation as Phase II is just evaluating if contamination is present not the extent.  Say three areas out of 14 need remediation (an unrealistic low number but just play it out).    Your next step is to define the 4 areas which could take another 30 days maybe 90 depending on soil and groundwater.   This situation actually played out on another site and the due diligence was 9 and 1/2 months.

Pro Tip

All you bankers, real estate professionals, sellers, buyers, and lawyers listen up.  Ask your environmental professional what they would estimate for a reasonable due diligence, when a Phase I & II may be necessary.  Before you ask do not give them your desired date of settlement, you will likely bias their answer. Although as environmental professionals we are not clairvoyant, we can assess sites from a desk, and utilize experience from other sites we have evaluated many times before to say you may want to budget 60 days or 90 days, if it's less, well then you can settle sooner.  You should also consider if any cost sharing will occur with Phase II between buyer and seller and what the seller's pain point is on paying for remediation.   

For example, the client had a retail strip of stores with historic groundwater contamination. The economical solution was to monitor the groundwater for 8 quarters to show a declining trend and permit the contamination in place.    The 2-year budget was $86,000, which was also the amount the seller was willing to place in escrow after the sale for the buyer to use to pay for the work. But the $86,000 was a budget and could trend higher or lower.   This confused the buyer as well as the fact that there would be costs after the site is signed off that the owner would be responsible for and this is assuming groundwater trends lower. Some sites do not and you need to perform remediation to push levels lower.   This is another situation where all parties were not transparent regarding time frames and costs and what each party was willing to accept.

Last example and let me dumb this down for you.  

A residence had a leaking tank, which was discovered during due diligence.  The future cost of remediation was determined, what was not discussed was the time frame to remediate and when state would review and sign off (typically 2 weeks to 6 weeks to 2 months, depending on your state).     Well at settlement these time frames were discussed and the buyer backed out at the settlement table.  Now the blame on this one was the environmental company not timelining the remediation (parties not asking either).   People went in with blinders on and the deal fell apart.

If your due diligence finds environmental concerns, know that environmental has no drive-through lane, no same-day delivery, heck not even a delivery date.  Like medicine and law, it’s a practice, a somewhat inexact science, but data sets are out there if you are willing to listen.  So rather than say due diligence is 30 days, ask what the consultant thinks is the reasonable time frame.   Play out a couple of scenarios so all parties have an idea of what could happen, plan for the worst, and hope for the best.

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Go to your doctor and no matter how healthy you look, they take tests. Go to the dentist, and you get x-rays.  Regarding environmental issues again you need to test to verify nothing is present.  If you do not test you have a 100% chance of not finding anything.

Environmental Due Diligence is meant to protect a purchaser, commercial due diligence starts with a Phase I and can lead to a Phase II (testing), which while buyers are aware a Phase II is a possibility, it can also find a problem, so why do a Phase II if finding something is not 100% certain?

The map below which is from the 1940's shows an auto sales storefront in a downtown area.  It lists a 550 Gallon Gasoline UST in front of the building.  Today there are retail stores with a coffee lunch spot.  Really zero current evidence of anything automotive or gas tank related.    So, say you want to buy the property.  Do you assume the gas tank is not there anymore?  No, you scan the area by completing a GPR Survey to make sure it's gone and if it's still there you have owner remove the tank.  

How about below, a then and now photo?   Are the tanks still there?  Do you think if the gas tanks leaked, and you owned the property you would be responsible?

What if you find that the tank is gone, well you now take soil samples to make sure there is no residual contamination.   And yes if contamination is found, the property owner owns the problem.

People suspect a building component contains asbestos based on appearance and age of building, but you do not know 100% unless you test.  When you are doing a risk assessment or any other form of environmental due diligence, you would assume the component contains asbestos until proven otherwise.  The same goes for PCB's in an electrical transformer.  Assume it contains PCBs until it is labeled otherwise.   So, while a property owner wants to believe these is no contamination, a buyer can't rely on that belief.  Hence the need for a Phase I and sometimes a Phase II which includes testing.

A case in point an older manufacturing plant (40 years) had a large outdoor compressor.   The compressor at time of sale was only 5 years old, nice and new.   But as an environmental consultant we ask what about the old compressor.  The issue with compressors is they can spit oil and older compressors were known for this.  A REC in the Phase I would be to do a Phase II with soil testing around the 4 sides of the new compressor to look for residual oil from the old compressor.    Yep that is how it works.

We had a group looking to buy a large corner property that had commercial operations in  1930's that could contaminate the property.  The buyers were excited to buy the property.  From decades of experience, we recommended testing prior to purchase.  Their response is below

Thank you for submitting a proposal for our project. As you may know, your company is one of only a few that recommend taking soil samples for analysis.   Obviously, once the analysis is completed, the results would need to be disclosed. Shouldn’t a property owner be concerned that these soil samples might uncover a problem that would need to be addressed further?

Our answer is yes if you find contamination it is reportable and the responsibility of the current owner to pay for.   So there are reasons why a property owner may not want to have a buyer do testing.

If you are buying or selling real estate you need an experienced environmental consultant 0n your side, call the experts

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There are inherent risks in life and in particular when you purchase something.   Warranties on products including cars are meant to balance the risk.  But when you buy a commercial property, you are buying more than the land and any improvements, you are buying any environmental issues past or present unless specified otherwise.  (There are sites that have government permitted contamination, that is a restriction on the property for sure. but it is s defined environmental liability). 

I am referring to the purchase of a property that has undiscovered environmental issues.  How you avoid buying a contaminated property is by performing Due Diligence such as a Phase I Environmental Site Assessment.  More about Phase I ESA Click Here.

As this article states when should you be concerned about environmental issues on a commercial property?

The safe answer is on every commercial property that you have not completed your own due diligence.

Yes, that downtown property you want to buy may have been an auto garage, dry cleaner, part of a rail spur, I've seen tanneries (Tanneries are where animal hides are tanned, and the wastes generated from tanneries are considered a pollutant to the environment and has potential to pollute both soil and water because of the use toxic chemical constituents in the tanning process). 

The rub of downtown areas is they were the center of commerce, which can cause pollution long before environmental regulations became the norm.   Buying close to a rail line?  Well rail roads caused contamination and land was often built up with historic fill.  (Historic Fill material was commonly used to raise the topographic elevation of properties.    The fill material is composed of non-indigenous material… which may have been contaminated prior to emplacement and is in no way connected with the operations at the location of emplacement and which includes, without limitation, construction debris, dredge spoils, incinerator residue, demolition debris, fly ash, or non-hazardous solid waste). Because of the nature of its composition, historic fill material is a widespread concern for many property owners and potential property purchasers.    In short, the property can have at the time of placement legal contamination, which today is no longer legal.

Yes, none of this is fair.  There are other warning signs when you buy a commercial property even when you perform due diligence, I will run down a couple of items buyers should be concerned about.

1.  A Phase I includes interview and questionnaire with the owner who is typically the most knowledgeable party.    When this can't be accomplished you have important data gaps, which may be intentional on part of the seller.

2.   The owner has no prior environmental reports, meaning they didn't do their own Phase I or will not supply their report.  Want to know why an owner may not want to be interviewed for a Phase I, their lack of due diligence can be a driver.  

The historical map below shows auto sales at a downtown property, and it also lists 550 gallon gasoline tank in the street.  That tank and contamination belongs to the property and will only be known if you do due diligence. 

3.  The Phase I leads to a Phase II, which is testing and can absolutely open up a can of proverbial worms.  If you test you have a chance of finding a problem.  No testing?  Well 100% chance of finding nothing.  But the rub is when the owner denies or limits testing.  For example, we had a site where both soil and groundwater testing were warranted.  The owner did not want groundwater tested because the property had municipal water.  Groundwater is typically the 1st water bearing zone on a property, a good average is 16' to 20' deep.  You are not drinking this water ever, but if this water is contaminated, well it belongs to the owner.   My point being sellers will come up with some nugget of reason why we do not need to test, which is irrelevant in the context of environmental due diligence.

4.   Owner provides reason why due diligence is irrelevant (remember buyer pays for the work not the seller).  Case in point client buying a former appliance store, which was a former laundromat.   Seller wanted no testing because refrigerators and microwaves are not an issue and a laundromat, well that's just dirty cloths.  Fast forward we test groundwater water and find dry cleaning solvents.  Conclusion, the laundromat did dry cleaning.  Saved our client $165,000.

Commercial Property Purchase Pro Tips

Start your due diligence and do not consider Due Diligence to be a hand stamp, because if you find an issue it will take time address it.

Understand that your proposed settlement date was likely set PRIOR to performing Due Diligence.  When Due Diligence finds an issue settlement could be pushed back weeks, months even years. 

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What is Environmental Due Diligence?

Environmental due diligence is the process that evaluates the environmental conditions and risks associated with a property. The process can be at the request of land developers, lenders, attorneys, or private owners who intend to purchase, refinance, or occupy a property.

The rub with performing environmental due diligence in real estate is buyers spend countless hours researching properties to purchase and when the right one is found, no one wants a delay or a cause a problem.

Environmental due diligence is essential for anyone looking to buy a property, whether commercial or residential. Hidden environmental liabilities are a massive problem you can face when purchasing a property that has not been evaluated for environmental due diligence; before making any large real estate transactions, make sure to understand the importance of this process.

When Is Environmental Due Diligence Required?

Lending institutions typically require environmental due diligence before they will finance a real estate purchase, refinance an existing loan, or accept collateral for a construction loan. If a cash buyer is involved, it is up to them to decide if a Phase I or other form of due diligence is necessary.

Who Benefits from Environmental Due Diligence?

Anyone purchasing a property can benefit from environmental due diligence, even if a lending institution is not involved in the sale. The process reduces the chances of someone purchasing real estate inheriting ecological concerns created by the former owners, it also provides an essential legal defense should issues arise.  Buyers get to know if there are environmental issues.  Sellers, although they typically would prefer a buyer not do due diligence, can avoid liability after the sale in the event contamination is found when a Phase I was not performed.  Lastly, lending institutions ensure that their loan is protected from contamination that can diminish the value of the asset.  A million-dollar property with a $400,000 cleanup is not worth 1 million dollars.

How Does Environmental Due Diligence Protect You?

Suppose environmental due diligence is performed before purchasing a property. In that case, the purchaser can gain protection from being held accountable for any pre-existing contaminations on the land according to the Comprehensive Environmental Response, Compensations, and Liability Act provisions. If this process is not completed, the new owner can be held responsible for repairing the contamination.

Buyers can also avoid being hit with the cost of environmental cleanup.   After completing tens of thousands of property transactions, the cleanup of sites is most commonly found when the current owner was lax in performing any environmental due diligence.     There are many properties that are being sold or planned to be sold that have been held by the owner for a number of years and they never did any environmental assessment of the property.  

What Does the Comprehensive Environmental Response, Compensation, and Liability Act (CERLCA) Require?

CERCLA establishes the process of determining who is liable for any hazardous substances on a property. Any property owners who are found to violate environmental due diligence can have to pay fines and fix the issues are their own expense, even if they aren’t responsible for the original contamination. Merely owning a contaminated property is enough to make you liable in the eyes of the law; this is why environmental due diligence is so necessary.

What is common Environmental Due Diligence?

The most common environmental due diligence is performing a Phase I ESA.  Phase I is an investigation into past and current ownership and uses of a property to assess the potential existence of hazardous substances or petroleum contamination on, in, or at a property.  It will even look at neighboring properties to see how they can affect the target property.   A Phase I ESA investigation is purely research and a site visit.  There is no testing during Phase I because you don't know if you have to test a site until Phase I is completed.   

There is a level of service you can expect from Phase I as they must be completed by an “environmental professional”.   The goal of the Phase I ESA is to identify recognized environmental conditions (“RECs”) that may affect the property or trigger liability for the buyer and determine whether further due diligence in regard to the RECs is appropriate.  Further evaluation can be Phase II or Phase III.  More about a Phase II & III can be found here  Phase II,  Phase III

A great resource with questions and answers regarding Phase I's can be found below. 

Phase  I  FAQ

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You break it you buy it.  Look before you leap.  You only have yourself to blame.  All common phrases.  Well environmental due diligence, i.e., a Phase I Environmental Site Assessment is an insurance policy of sorts that protects buyers of commercial properties.  Phase I is a historical and current assessment of a property for environmental issues (read costs to remediate contamination on a property).   But there are two "rubs" when doing a Phase I.  First, no buyer wants to find a problem with the property they are buying (trust me, I have heard clients say they hope we don't find anything countless times).  I call these people Hand Stampers because they want to get stamped that they did a Phase I and nothing was found, I call it unrealistic.   Do you think testing was required in the below photo?  The answer is yes.

The second rub of Phase I is that some 80% of the time, a Phase I is needed, apartment buildings much lower percent.   When Phase II testing is necessary the buyers are surprised by Phase II cost and the cost disparities (when they have time to price shop).  The rub is that a Phase I is 100% office work, a Phase II requires that same Phase I person, but now you are dealing with the environmental trades that 90% of environmental consultants subcontract out.  These Phase II services include Geophysical Surveys,  (GPR), and drilling (that's how you collect soil and groundwater samples). and perhaps excavation for test pits or removal of contamination (which technically is Phase III).   

All these services get marked up by the consultant.  You have to understand that consultants have insurance and workers comp that lists them as clerical, which is a very inexpensive insurance rating, most can't even use a shovel or it can place their personnel into a different workers comp rating which is more expensive.   So most all consultants subcontract services and markup the subcontractor, who does the heavy lifting so to speak.

We were asked to quote a Phase II for a buyer.   Our Phase II  cost was $3,500.00 and basically involved investigating locations where tanks were removed without testing.  The company that did the Phase I quoted the Phase II at  $7,800.00  the $4,300.00 difference represents the consultant's markup and recouping expenses from doing a discounted Phase I, Curren sees this discrepancy all the time.  Our client asked why the price differential, which I just explained to you and they said we should let more people know,  hence why you are reading this article.

Now, why would I want to let you know that consultants discount Phase I's knowing they will make it up on the Phase II work.   Well our recent client, who now has hired us for another property they are purchasing (Phase I), said we should.     

Curren Environmental could be considered a boutique or full-service company as we do the consulting and the environmental contracting (heavy lifting).   We find clients like being able to deal with one company and of course the financial savings.

Do you have Phase II Questions?

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Commercial Due Diligence includes performance of a Phase I ESA

Well how do you perform a Phase I ESA during Covid-19, when government offices are closed or minimally staffed delaying records request and you have settlement in 3 weeks?

Well how do you perform a Phase I ESA during Covid-19, when government offices are closed or minimally staffed -  delaying records request and you have settlement in 3 weeks?  In short you add this known delay into contract as buying real estate during Covid-19 is an unprecedented task.

Lets say you are buying a commercial building in New Jersey during Covid-19 and there are NJDEP (New Jersey Department of Environmental Protection) files that require review.  Of important note if any government environmental agency has records on the property you are purchasing you want those files reviewed.

You do due diligence not just to research current operations but what occurred at the property in the past.

Curren was performing a phase I for just such a situation and here is a quick summary of the obstacle faced with public records and Phase I ESA's.

Open Public Records Act (OPRA) request was  submitted an OPRA records request to the NJDEP on July 1, 2020.

On July 14, 2020 Curren received a response from the NJDEP indicating that due to the COVID-19 restrictions indicting “the NJDEP is not able to fully respond to record requests within the prescribed timeframe under the Open Public Records Act, N.J.S.A.47:1A-1 et seq (OPRA). The NJDEP work force has transitioned to work remotely from home, impacting the NJDEP's ability to access onsite and archived government records, conduct onsite inspections, and copy responsive records. In accordance with N.J.S.A. 47:1A-5(i)(2), which states that the deadlines under OPRA, to grant or deny access to a government record shall not apply if no reasonable efforts are available based on the circumstances, and in maintaining consistency with the social distancing directives of the Governor, the NJDEP is not able to complete the search for responsive records and respond to this request. Once resources allow, the NJDEP will complete and issue the final Government Records Request Form response to this request. We apologize for this inconvenience.”.

On July 13, 2020 the NJDEP submitted a response indicating “At this time, your request is not able to be completed within the statutory time frame specified in OPRA”.

On July 20, 2020, Curren received another response from NJDEP indicating that “Based on this record request, responsive records have been identified and will be emailed to you within 5-business days”.

On August 6, 2020 Curren reached out to the NJDEP requesting information as to the status of the email. In response to this email the NJDEP requested that Curren recontact them if the information was not received by August 18, 2020.

On August 20, 2020, Curren again submitted a request regarding the status of the information and received a reply indicating that we should have the data by Monday August 24.

On August 21, 2020, Curren received an email from the NJDEP with pdf files regarding the site. 

So approximately 7 weeks after a request was submitted the public records were produced.  You can repeat this same story for Phase's performed in Pennsylvania and Delaware, where we have seen similar delays.

If you are buying a commercial property and you are completing a phase I ESA, you need to prepare for longer reporting time frames.

If there one aspect of the economy that has strong forward momentum it is residential and commercial real estate sales.  The boom in real estate transactions (transactions are limited based on availability of properties for sale) are driven by historically low interest rates and the economic blow of Covid-19 on businesses that are driving prices lower and creating a buying opportunity for strategic investors.   In short there are businesses that are closed and real estate is being listed for sale and sold.  This is occurring by both owner operators of property as well as owner/landlords that have lost rental income and are selling the properties. By strategic investors we are referencing a buyers that have near immediate plans for the properties being purchased.  The closure of restaurants and many small business due to Covid-19 has left a dramatically different real estate market

Commercial Due Diligence includes performance of a Phase I ESA.    A Phase I researches current and past operations and diligent inquiries encompass obtaining and reviewing available public records.  Anything submitted to a government agency by nature is subject to review under the Open Public Records Act or OPRA.   Having a Phase I without reviewing OPRA records leaves a gaping data gap in your due diligence.

Expert Due Diligence Advice