As a commercial real estate broker, you need as many tools in your toolbox to look out for the best interests of your clients. One of the most important tools that you need for your due diligence is an environmental site assessment (ESA).
There are multiple types of ESAs to be aware of, including ESA Phase 1 and 2. There is a third type of ESA, known as Phase 3 or remediation. However, you will come across ESA Phase 1 and 2 more often. Because of this, it’s crucial to understand the roles of these assessments to support your deals.
What Is a Phase 1 ESA?
A Phase 1 ESA is an entry-level assessment. A Phase 1 ESA is designed to look for the presence of recognized environmental conditions (RECs). Some common RECs include:
- Underground tanks
- Above ground tanks
- Pipelines
- Steel drums
- Miscellaneous contaminants
The findings of a Phase 1 ESA will be detailed in the final report. The report will include pictures and an explanation of the assessor’s concerns.
Typically, Phase 1 ESAs involve an on-site inspection. During the ESA, assessors will also review files like:
- Title history
- Transaction records
- Past uses of the land
- Ownership records
- Fire (Sanborn) maps
- Historical aerial photographs
- Historical topographic maps
- Surveys
These records will reveal past uses of the site. It will also help the ESA firm such as RSB Environmental decide whether a Phase 2 assessment is required.
Why a Phase 1 ESA Matters
Phase 1 ESAs are part of due diligence. The information gathered during a Phase 1 ESA will help your client make an informed purchasing decision:
- They will be able to estimate the land’s value better.
- They will be more aware of any potential risks or hazards.
- They will be protected from liability.
If your client buys land and no Phase 1 ESA was conducted, they are responsible for any contamination. This could cost them millions. Even worse, the land might not be usable for their intended project.
Phase 1 ESAs also protect your financial institution. If a buyer defaults on the loan, Phase 1 ESAs can help your institution recoup its losses.
What Is a Phase 2 ESA?
Phase 2 ESAs are follow-ups to Phase 1 ESAs. Phase 2 ESAs may or may not be required. If a Phase 1 ESA does not find RECs, no Phase 2 is needed. But if RECs are found, a Phase 2 assessment should be booked.
A Phase 2 ESA focuses on any RECs found during the Phase 1 review. Inspectors will collect water and soil samples. These samples are then sent to a lab for testing. The tests will determine what contaminants are present and in what quantities.
Just because a Phase 2 ESA is required does not mean that a deal is sunk. The Phase 2 ESA might determine that there are no contaminants present. Alternatively, it might determine that contaminants are present, but are below required thresholds.
Why a Phase 2 ESA Matters
Phase 2 ESAs dig deeper into RECs. This assessment determines what contaminants are present and if the site is suitable for use. Phase 2 ESA data can dramatically impact the value of a property. Therefore, Phase 2 ESAs are vital if any RECs are found.
Phase 2 ESAs will reveal if the land fits the buyer’s needs. It will also determine whether remediation is needed or if it is ready to use as is. This information will have a significant influence on your buyer’s decision-making process.
Also, from a timeline perspective, a Phase 2 ESA plays a critical role in helping you satisfy contractual obligations. You typically have 30 days to perform due diligence once under contract. Phase 2 ESAs can be booked and finished in 2-3 weeks. There are times when the review can be expedited, but this is not always possible.
As a result, you should always try to book a Phase 2 ESA as soon as you are under contract.
What About Phase III ESAs?
If a Phase 2 ESA reveals notable contamination, a Phase 3 ESA will likely be required. Phase 3 ESAs involve remediation efforts.
Remediation is the process of reducing the number of environmental contaminants that are present, which makes it quite expensive. This assessment may involve processes like:
- Soil removal
- Groundwater monitoring
- Vapor extraction
- Capping
The goal of Phase 3 remediation is to make land usable. However, it is important that your client obtains an estimate on Phase 3 costs before making a purchase. In some cases, the cost of a Phase 3 ESA will make the deal impractical. At a minimum, the need for a Phase 3 ESA will reduce the value of the land.
Remediation efforts have come a long way over the years. Still, a Phase 3 ESA does not guarantee that all use restrictions will be removed. At times, federal law may still prevent certain land uses. For example, your buyer might not be allowed to use on-site water for drinking purposes.
Best Practices for Conducting Environmental Site Assessments in Real Estate Transactions
When conducting Environmental Site Assessments (ESAs) in real estate transactions, it is essential to follow best practices to ensure accurate and reliable results that can help property buyers, sellers, and developers make informed decisions. One of the key best practices is to engage a qualified environmental consultant with experience in conducting ESAs. An experienced consultant will be familiar with the applicable regulations and industry standards, such as the ASTM E1527-21 Standard Practice for Environmental Site Assessments in the United States, and can efficiently guide the assessment process.
Another best practice is to ensure a thorough and well-documented Phase 1 ESA, as this forms the foundation for understanding the environmental risks associated with a property. A comprehensive Phase 1 ESA should include a review of historical records, site visits, interviews with knowledgeable parties, and an evaluation of potential environmental risks from neighboring properties. If a Phase 1 ESA identifies recognized environmental conditions (RECs), it is important to proceed with a well-planned Phase 2 ESA that includes a clearly defined scope of work, appropriate sampling strategy, and proper laboratory analysis methods. By adhering to these best practices, stakeholders can better manage potential environmental liabilities and facilitate successful real estate transactions.
How You Can Expedite the Assessment Process
Generally, a Phase 1 ESA can be completed in 5-7 days. The standard is 3-4 weeks, but firms like RSB Environmental strive to generate the report sooner.
Phase 2 ESAs take a bit longer to complete. Typically a Phase 2 ESA will take 2-3 weeks. Again, faster turnarounds are sometimes available.
Even with a shorter delivery window, a complete ESA Phase 1 and 2 assessment can take 3-4 weeks if booked separately. The good news is that RSB offers a combo service that includes both. You should book this service if you know your client’s property will require a Phase 2 ESA. A few examples include:
- Gas stations
- Dry cleaning facilities
- Oil and gas plants
By using our combo package, you can obtain both reports faster and give your client more time to make their decision about whether to continue with the deal. We encourage you to take action to support your transaction:
– You can reach out to us to discuss the opportunity to package an ESA Phase 1 and 2 review. We will walk you through the requirements, provide you with the overall cost of a Phase 1 environmental site assessment and a Phase 2 environmental site assessment, and help you get scheduled.
– We invite you to learn more about ESAs and other due diligence topics that pertain to your role. You can sign up for our email newsletter to start receiving helpful information directly to your inbox. To sign up, simply email info@rsbenv.com to be added to our list.
Frequently Asked Questions
What is the purpose of an Environmental Site Assessment (ESA) in real estate transactions?
An ESA is conducted during real estate transactions to identify potential or known environmental concerns associated with a property. This helps property buyers, sellers, developers, and lenders make informed decisions, manage potential liabilities, and comply with environmental regulations. ESAs help protect human health and the environment while facilitating property transactions and redevelopment.
How does a Phase 1 ESA relate to real estate transactions?
A Phase 1 ESA is typically conducted during property transactions, such as a sale or transfer of ownership, or as part of the due diligence process for obtaining financing or insurance. It evaluates a property’s environmental history and potential for contamination by reviewing historical records, conducting site visits, and identifying recognized environmental conditions (RECs). If RECs are found, a Phase 2 ESA may be necessary to further investigate the potential contamination.
How can an ESA affect the value of a property?
An ESA can directly affect the value of a property by identifying environmental risks or contamination that may require remediation, limit the property’s development potential, or expose the buyer or seller to potential liabilities. Properties with significant environmental issues may have a lower market value or be more difficult to sell, while properties with a clean bill of environmental health may be more attractive to buyers and command a higher price.
How does an ESA protect property buyers from potential environmental liabilities?
By conducting an ESA as part of the due diligence process, property buyers can identify potential environmental risks associated with a property and make informed decisions about whether to proceed with the transaction or negotiate for a lower price or remediation requirements. In the United States, for example, conducting an ESA can help buyers qualify for the “innocent landowner” defense under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), which provides protection against liability for pre-existing contamination.
Are Environmental Site Assessments required by law in real estate transactions?
While ESAs are not universally required by law, they are often necessary to meet the requirements of lenders, insurers, or regulatory agencies involved in property transactions. Additionally, conducting an ESA can provide property buyers with important legal protections against environmental liabilities, as well as help sellers demonstrate that their property is environmentally sound, thus facilitating a smoother transaction process.
