Are you about to purchase a commercial property, but not sure if it requires a Phase I Environmental Site Assessment (ESA)? Lenders, and prospective property buyers, must gauge the cost of a Phase I ESA versus the probability that an environmental issue exists, which could negatively affect the value of the property. Federal regulations do not require that a Phase I ESA be conducted on every commercial real estate transaction.
However, CERCLA liability protection is only afforded when such assessments are initiated prior to the purchase of a property. Property use and history of use dictate whether or not a bank will require a Phase I ESA before offering a loan. If paying cash, a prospective buyer should also consider these same conditions in deciding to conduct a Phase I ESA. Since everyone’s risk tolerance is different, there are some gray areas. There are also some occasions where a Phase I ESA is clearly warranted.
A Phase I ESA should always be obtained if:
A Phase I ESA should be conducted if a property has been used for an environmentally-sensitive industry or is in close proximity to a business in an environmentally-sensitive industry.
Prudent lending practices dictate that specific additional environmental assessments be performed that are outside the normal scope of a typical Phase I ESA for certain special use facilities. For example, property constructed prior to 1980 that will be used for daycare or child-care centers or nursery schools should undergo a lead risk assessment (for lead-based paint) and testing for lead in drinking water. Individuals living in residential care facilities constructed prior to 1980 may also be at increased risk for lead exposure and prudent lending practices dictate that these facilities also undergo a lead risk assessment.
Due diligence and risk tolerance will dictate the need for a Phase I ESA. There are often great bargains to be had when purchasing a property that holds or was previously occupied by an environmentally-sensitive industry. A thorough environmental site investigation may mitigate that risk. In these cases, a Phase I ESA is often not enough and we recommend a much more extensive and targeted investigation of the property called a Phase II ESA. Once the buyer understands the risks, and potential cost, of the environmental impact, the property can be valued accordingly. Contact us if you have any other questions or concerns!