Environmental site assessments, or ESAs, are a vital part of due diligence in any commercial real estate transactions. While the basic idea of ESAs is well understood, a complete understanding can be a little more challenging because there are three different environmental assessment phases.
The three types of ESAs are:
Knowing when you may need each type of ESA will help protect your interests during commercial real estate deals. Depending on your specific situation, you may not even need all three ESAs. In fact, for many deals, you will only need a Phase I assessment. Let’s take a closer look at the various assessments.
What’s an Environmental Condition Assessment?
So what is an environmental condition assessment? This term is often used interchangeably with an environmental site assessment. That’s because they are the same.
Both terms refer to the process of assessing a site. During an assessment, inspectors look for any environmental hazards on the property. If hazards are discovered, further testing may be necessary.
For example, let’s say you want to buy a property. However, assessors discovered that the property was once home to a dry cleaning service. In this case, soil and groundwater testing will be required.
Just because a site was home to a dry cleaner doesn’t mean the property is unusable. It simply means that testing is required to ensure the site is safe for use. That is the spirit of an ESA.
The Three Environmental Assessment Phases
As you can imagine, assessing a variety of hazards can be complex. That is why the assessment process is broken up into three phases. Think of these phases as building blocks.
The Phase I ESA comes first. Sometimes, it will set the stage for a Phase II ESA. In other cases, the Phase I ESA may reveal a Phase II is not needed.
Likewise, Phase II ESA results determine whether a Phase III may be required. If a Phase III is needed, the findings from the Phase II report will act as a guide for remediation efforts.
So what happens during each phase? Below, we’ll dive into the basic activities that occur in each stage:
Phase I ESA
During a Phase I ESA, assessors will do basic research. The first step is a review of the site’s usage history, which involves the following:
- A review of any transaction records
- Title research
- Review of aerial photographs and Sanborn maps
- Visiting the site in person
Assessors are looking for recognized environmental conditions (RECs) during their research. An REC is not the same as an actual hazard. Instead, it indicates that a hazard might be present.
For example, let’s say an ESA team finds an underground storage tank. The tank would be labeled as an REC. So how can you know if it’s a hazard? The answer depends on the contents of the tank.
If the tank simply held water, it would not impact the site’s usability. But if the tank was used to store a toxic chemical, a Phase II ESA will be needed.
Every REC that is uncovered will need to be investigated. All RECs are then documented in the Phase I ESA report. Assessors use these findings to determine the scope of the Phase II ESA.
Phase II ESA
Phase II ESAs are only needed if the Phase I ESA reveals the presence of RECs. A Phase II ESA is highly targeted. For a Phase II report, assessors will gather soil and groundwater samples from the areas that were potentially impacted by RECs.
The samples are sent out to a lab for testing. The test results will reveal two things:
1. They will let assessors know if any hazardous substances are present.
2. The tests will reveal if these substances are present in quantities that exceed safety thresholds. A Phase III ESA will be needed if hazardous substances are found at high or dangerous levels.
Phase III ESA
A Phase III ESA is also known as “site remediation.” During remediation, teams work to reduce or remove contaminants. The remediation team will remove contaminants from the soil or groundwater.
Excavating and replacing contaminated soil is the most common type of remediation. However, more advanced methods exist as well.
The scope and cost of remediation can vary greatly. Assessors will provide an estimate for remediation as part of the Phase II ESA report. This estimate helps buyers decide whether the property is still a viable investment.
Want to Learn More About Due Diligence Practices?
The three environmental assessment phases are essential in the due diligence process to protect your interests in a commercial real estate transaction.
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