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Phase 1 Environmental Site Assessments – A Comprehensive Overview

Phase 1 Environmental Site Assessment

The Phase 1 Environmental Site Assessment is a report that illuminates the environmental liability associated with a real estate asset.   A Phase 1 Environmental Site Assessment (ESA) is required by lenders during the financing of commercial real estate.   The environmental consultant providing the Phase 1 ESA is required to inspect the property, review historical records on the property and research records available at government agencies.   This information is evaluated and an opinion is made as to whether past or present activities may have caused contamination of the soil or groundwater at the subject property.

In the event that the Phase 1 ESA uncovers a recognized environmental condition (REC)*, the environmental consultant will typically recommend a Phase 2 Environmental Site Assessment, which involves invasive soil or groundwater testing.   The geologist or engineer designing the Phase 2 Environmental Testing scope of work will rely on the Phase 1 Environmental Report to understand Areas of Concern and Chemicals of Concern. 

ASTM E1527-05

In 1993 the American Society for Testing and Materials (ASTM) published the first ASTM Standard: ASTM E1527-93 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process.   Since then the standard has been updated several times, with the most recent update occurring on in 2005.  

The ASTM E1527-05 standard outlines the purpose and use of the Phase 1 ESA as well as the scope of work to be conducted, including: records review (historical and governmental records); site reconnaissance (inspection of the property and adjacent sites); interviews (with owners and occupants and local government officials); evaluation and report preparation.

Certain items are considered out of the scope of work for an ASTM Phase 1 ESA, such as asbestos, lead-based-paint (LBP), mold and radon; however, many consultants take these potential concerns into consideration during the Phase 1 process (discussed further below).

US EPA’s All Appropriate Inquiry Standard (AAI)

Federal law requires purchasers of real estate to do “all appropriate inquiry” to qualify for the innocent landowner defense under CERCLA*.  Ordering a third party Phase 1 Environmental Site Assessment has traditionally been the method by which landowners qualify for the all appropriate inquiry standard.  In 2005, the EPA published its final rule on requirements for all appropriate inquiry.

To a large extent the all appropriate inquiry (AAI) standard for Phase 1 Environmental Site Assessments mimicked the existing ASTM E1527-00 Standard.   The new AAI Standard for Phase 1 Environmental Site Assessments required a few new scope items, including:

1)      A more stringent definition of who qualifies as an Environmental Professional*, the person under which an AAI Phase 1 ESA must be conducted

2)      The AAI Phase 1 ESA allows either the user or the environmental professional perform a search for environmental liens (however the updated ASMT E1527-05 standard designates this as the user’s responsibility)

3)      Mandatory interviews, some of which were not previously mandatory

4)      Documentation of data gaps or uncertainties     

To a large extent the industry quickly adapted the AAI ruling for Phase 1 ESAs, which went into effect on November 1, 2006.   In 2005 the ASTM E1527 standard updated to include the major elements of the final AAI ruling.   The one exception is the environmental lien search requirement.  Many lenders have developed a “business risk” scope of work for Phase 1 Environmental Site Assessments that exclude the environmental lien search, as the environmental lien search is considered by some to not be worth the extra cost.

Today the EPA recognizes two ASTM standards as being AAI compliant: the ASTM 1527-05 Standard, as well as ASTM E2247-08 Standard, discussed below.

ASTM E2247-08

An additional ASTM standard for conducting Phase 1 ESAs was created in 2008 specifically for large tracts of primarily undeveloped land: ASTM E2247-08 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process for Forestland or Rural Property.  The standard is very similar to the E1527-05 standard, with a few key exceptions: the approach to site reconnaissance (makes provisions for limited inspection/access), the regulatory records search (additional records requirements) and historical sources (fewer “standard” sources).

Other Custom Scopes of Work for Phase 1 ESAs

Most buyers must do the Phase 1 Environmental Study for a loan and many lenders and government agencies have developed custom scopes for work for Phase 1 Environmental Site Assessments.   A few examples are below:

SBA Phase 1 Environmental Site Assessments—SBA SOP 5010

The US Small Business Association (SBA) requires an environmental investigation of all commercial real estate loans, and has specific requirements for what kind of investigation is required and when. The requirements are based on a property’s environmental risk (determined by its NAICS Code*).  Some of the main particular requirements are: 

–          Environmental Questionnaires and/or Records Search with Risk Assessments (RSRAs) are required on “lower risk” sites (no NAICS Code match)

–          “Higher risk” sites (with NAICS Code matches), must do a Phase 1 to start, except for “Car Wash Only Facilities”, which must do an Environmental Transaction Screen to start

–          Requirements for gas stations: Phase 1 and equipment testing compliance review

–          Requirements for dry cleaners: Phase 1, and automatic Phase 2 if the facility is 5 years or older

–          Requirements for pre-1980 day cares/schools/residential care facilities: lead-based-paint risk assessment and lead testing in drinking water

–          Phase 2s on gas stations and dry cleaners must be conducted by an environmental professional with a current professional geologist’s or engineer’s license

–          Require the consultant to grant the SBA reliance on the reports

The SBA generally recognizes the ASTM Standards for conducting Phase 1 ESAs.  Each October the SBA releases any new changes or updates to its standard operating procedures.

Fannie Mae Phase 1 Environmental Site Assessments

Fannie Mae has specific requirements for Phase 1 ESAs on its loans, which are detailed in the Environmental Hazard Management Procedures and Sections 209-310 of the Fannie Mae Guide. Fannie Mae generally recognizes the ASTM Standards for Phase 1s with some modifications, the main components of which are:

–          Site inspection is required to cover 10% of a property’s units, and 50% of any down units

–          Requires testing for asbestos, lead and radon in some circumstances:

  • Considers building materials from 1979 or earlier as suspect asbestos-containing-materials (ACM). If consultants suspect ACM, they can either test for asbestos or recommend creating an ACM Operations & Maintenance (O&M) Plan (and assume that ACM is present)
  • Requires testing for LBP on buildings constructed before 1978 unless it gives the lender a waiver, in which case LBP must be assumed present and an LBP O&M Plan be implemented
  • Requires testing for lead in drinking water when a property has a private, non-municipal water supply
  • Leaves radon sampling to the discretion of the consultant; however, it is prudent to conduct at least minimal sampling at properties in Zone 1 radon areas

Freddie Mac Phase 1 Environmental Site Assessments

Freddie Mac environmental assessments are conducted in accordance with the Freddie Mac Multifamily Seller/Servicer Guide and Chapter 14, “Environmental Requirements.”  Freddie Mac generally recognizes the ASTM Standards for Phase 1s with some,the main components of which are:

–          Site inspection is required to cover 10% of a property’s units, and 50% of any down units

–          Check for State Super Lien Law, which would allow the state to place a first priority lien on a property in response to contamination

–          Requires testing for asbestos, lead-based-paint (LBP), mold and radon in some circumstances:

  • Freddie leaves it to the consultant to determine the potential for ACM; however, prefers that consultants do not use a cutoff date for determining ACM potential. If consultants suspect ACM, they can either test for asbestos or recommend creating an ACM O&M Plan (and assume that ACM is present)
  • Requires that borrowers either test for LBP on buildings constructed before 1978, or assume LBP is present and implement an LBP O&M Plan
  • Requires testing for lead in drinking water when a property has a private, non-municipal water supply
  • Requires that consultants investigate for mold-related hazards
  • Requires radon sampling in Zone 1 radon areas: 10% of the lowest level units, or 1 sample per building, whichever is greater

HUD Phase 1 Environmental Site Assessments

HUD requires ASTM Phase 1 ESAs with additional Environmental Reviews (HUD Form 4128), which go well beyond the ASTM requirements. The 4128 Form covers a range of potential impacts of a project including:

–          Zoning

–          Air quality

–          Coastal barrier resources

–          Floodplains/wetlands and other natural features

–          Historic preservation

–          Noise abatement

–          Hazardous operations/toxic and radioactive chemicals (determined by the Phase 1)

–          A range of other concerns regarding the site location, suitability, stability, social/municipal services and transportation

If a potential issue is identified in the 4128 checklist, then further study may be required, such as formal Noise Surveys for properties in potential high-noise zones (an initial noise analysis is required on all projects). 

During the environmental review process, HUD also goes beyond ASTM by requiring lead paint surveys or Operations & Maintenance Plans (based on the age of the property), and vapor encroachment screenings (for all projects).

Foreclosure Phase 1 Environmental Site Assessments

Phase 1 ESAs done during pre-foreclosure process are similar to normal Phase 1s; however, strict adherence to the AAI/ASTM requirements is critical in order to maintain the secured creditor exemption or innocent landowner defense under CERCLA.  This includes conducting an Environmental Lien and/or Chain of Title search, which many lenders forego at loan origination. Some other concerns to consider:

–          Site access can be difficult due to recalcitrant site contacts

–          Asbestos, lead paint, radon, mold and other non-scope issues must be managed in order to maintain an assets’ safety and value

–          Erosion control at unfinished construction sites and other compliance concerns (not covered by AAI/ASTM)

–          A lender should evaluate any potential environmental liability and cleanup costs in comparison with the asset value when deciding whether to foreclose

Common Scope Additions to our Phase 1 ESAs

ASTM E1527-2005 recognizes several common additional scope items.  In our practice of environmental due diligence, we find that a lot of our clients are interested in investigation other environmental concerns under the cover of the Phase 1 Environmental Site Assessment.   The most commons additional scope items are:

1)      Asbestos Survey:  an asbestos survey is particularly important to buyers of old buildings or buyers who plan to demolish the buildings;

2)      Lead Paint Surveys: important in residential settings, for schools, and when a building is going to be demolished;

3)      Environmental Compliance Audits:  clients buying complex industrial operations are concerned about recognized environmental conditions as defined by ASTM E1527 as well as material non-compliant practices.    A Phase 1 ESA/Compliance Audit is the best way to understand all of the environmental liabilities associated with a manufacturing facility.

4)      Mold Survey: common for residential and hotels users of our service;

5)      Indoor Air Quality Survey:  common for high end office buyers and hotel buyers;

6)      Phase 2 Environmental Site Assessment:  clients buying property with known environmental concerns may want to do the Phase 1 & 2 Environmental concurrently.

For any questions on Phase 1 Environmental Site Assessments feel free to contact me or our Nicole Moore, our Technical Director of Environmental Due Diligence at 800-801-4923. 

Definitions

*A REC is defined as “the presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release, or a material threat of a release of any hazardous substances or petroleum products into structures on the property or into the ground, ground water, or surface water of the property.”

*CERCLA stands for Comprehensive Environmental Response, Compensation and Liability Act, commonly known as the Superfund law

*Environmental ProfessionalSomeone who possesses sufficient specific education, training and experience necessary to exercise professional judgment to develop opinions and conclusions regarding conditions indicative of releases or threatened releases of hazardous substances (or petroleum products) on, at, in or to a property. An EP must have:

–          A state or tribal issued certification or license and 3 years of relevant full-time experience; or

–          A Baccalaureate degree or higher in science or engineering and 5 years of relevant full-time work experience; or

–          10 years of relevant full-time work experience.

*NAICS Code: North American Industry Classification System. The SBA maintains a list of NAICS Codes of environmentally sensitive industries.

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Profile photo of Joe Derhake, PE
Education: MBA, University of Southern California BS, Civil Engineering, Michigan State University Registrations: Registered Professional Civil Engineer, California Registered Professional Civil Engineer, Arizona Registered Professional Civil Engineer, Tennessee EPA Accredited Asbestos Inspector, Management Planner Designer (not current) Affiliations: Member, Environmental Banker's Association Member, Mortgage Banker's Association Mr. Derhake serves as the President of Partner Engineering and Science, a national engineering and environmental consulting firm. He has over 10,000 real estate transactions throughout his career. His due diligence resume includes experience at all levels, including advising lenders and real estate investors through the following product types: Phase I Environmental Site Assessments, Phase II Subsurface Investigations, Phase III Site Characterizations, Remedial Cost Estimates, and Environmental Transaction Screens. Mr. Derhake has a significant portfolio of closed sites and speaks regularly at industry events and conferences.

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18 Comments

  1. June 6, 2011, 10:02 am   / 

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  2. May 14, 2011, 3:41 pm   / 

    […] firm does a Phase 1 Environmental Site Assessment and finds that a retail center with no on-site RECs and on city water is 100 feet from a dry […]

  3. April 28, 2011, 6:57 am   / 

    […] Now if you are working in this make believe state on the gas station with no existing subsurface data, you could site that the Average EEL for gas stations in this state is $164,000.   Then just like structural engineers adjust PMLs for unique characteristics, the environmental professional could adjust the EEL up or down based on site specific data, such as groundwater, soil type, or proximity to sensitive receptors.   The end result would be a bit inexact for sure, but would give clients a great order of magnitude appreciation of risk.  […]

  4. April 27, 2011, 2:55 am   / 

    […] Now if you are working in this make believe state on the gas station with no existing subsurface data, you could site that the Average EEL for gas stations in this state is $164,000.   Then just like structural engineers adjust PMLs for unique characteristics, the environmental professional could adjust the EEL up or down based on site specific data, such as groundwater, soil type, or proximity to sensitive receptors.   The end result would be a bit inexact for sure, but would give clients a great order of magnitude appreciation of risk.  […]

  5. April 24, 2011, 7:35 am   / 

    […] or substantial rehabilitation) and the Phase I ESA must meet both the requirements of the American Society of Testing Materials (ASTM) Standards E1527 and the requirements of HUD “Environmental Assessment Guide for Housing Projects” and the HUD  […]

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  6. April 23, 2011, 2:37 pm   / 

    […] Now if you are working in this make believe state on the gas station with no existing subsurface data, you could site that the Average EEL for gas stations in this state is $164,000.   Then just like structural engineers adjust PMLs for unique characteristics, the environmental professional could adjust the EEL up or down based on site specific data, such as groundwater, soil type, or proximity to sensitive receptors.   The end result would be a bit inexact for sure, but would give clients a great order of magnitude appreciation of risk.  […]

  7. April 7, 2011, 6:10 am   / 

    […] as the primary reason to consider an off-site release a Recognized Environmental Condition in a Phase 1 Environmental Site Assessment.  A large up-gradient release can migrate in vapor phase or through ground water and create a […]

  8. April 1, 2011, 10:01 am   / 

    […] as the primary reason to consider an off-site release a Recognized Environmental Condition in a Phase 1 Environmental Site Assessment.  A large up-gradient release can migrate in vapor phase or through ground water and create a […]

  9. March 23, 2011, 1:47 am   / 

    […] as the primary reason to consider an off-site release a Recognized Environmental Condition in a Phase 1 Environmental Site Assessment.  A large up-gradient release can migrate in vapor phase or through ground water and create a […]

  10. March 18, 2011, 9:45 am   / 

    […] as the primary reason to consider an off-site release a Recognized Environmental Condition in a Phase 1 Environmental Site Assessment.  A large up-gradient release can migrate in vapor phase or through ground water and create a […]

  11. March 17, 2011, 5:45 am   / 

    […] as the primary reason to consider an off-site release a Recognized Environmental Condition in a Phase 1 Environmental Site Assessment.  A large up-gradient release can migrate in vapor phase or through ground water and create a […]

  12. March 16, 2011, 1:46 am   / 

    […] as the primary reason to consider an off-site release a Recognized Environmental Condition in a Phase 1 Environmental Site Assessment.  A large up-gradient release can migrate in vapor phase or through ground water and create a […]

  13. March 14, 2011, 9:44 pm   / 

    […] as the primary reason to consider an off-site release a Recognized Environmental Condition in a Phase 1 Environmental Site Assessment.  A large up-gradient release can migrate in vapor phase or through ground water and create a […]

  14. March 14, 2011, 10:34 am   / 

    […] significant.  Nevertheless, when a lender is taking title to property they usually want the Phase I ESA with no […]

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  15. March 14, 2011, 10:31 am   / 

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  16. March 14, 2011, 10:30 am   / 

    […] Phase 1 Environmental Site Assessment can easily address erosion control issues at the same time.   To do this, the client should work […]

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  17. March 14, 2011, 10:26 am   / 

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  18. March 14, 2011, 10:25 am   / 

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