What Should You Do With Your Phase 1 ESA Report?

In the United States, commercial properties are heavily regulated by federal and state entities. The most well-known of these entities is the Environmental Protection Agency. The EPA and state and municipal agencies will hold land owners accountable for any contamination that occurs to their commercial properties.

Therefore, it’s critical for buyers, investors, bank lenders, commercial real estate brokers, and any other entity involved in a deal to perform due diligence before closing a transaction. This way, stakeholders can discover any potential environmental hazards that are present on the land.

For example, lenders can use this information to protect the new owners from liability, avoid financing high-risk or unusable property, and help guide their client on how to negotiate a fair price for the land.

While there are many different services that fall under the umbrella of due diligence, one of the most important is a Phase I environmental site assessment (ESA). Once a site assessment is completed, the findings will be documented in a Phase 1 ESA report.

As a loan officer or commercial real estate broker, it is critical that you know how to navigate the findings of this report to locate information that is pertinent to you and your client. However, that can be challenging because the average Phase 1 ESA report for developed land will exceed 400 pages.

So what should you do with your Phase 1 ESA report? This guide will answer that very question and provide other valuable information that you can use to better serve your clients.

What Is a Phase I ESA?

A Phase 1 environmental site assessment is considered to be the most preliminary phase of environmental due diligence.

During this non-invasive assessment, inspectors will conduct comprehensive research on a parcel. The research will include a review of transaction records, usage history, aerial photographs, maps, and other relevant documents.

Traditionally, Phase 1 ESAs involve an on-site visit. However, such a visit is not required. The best assessment teams perform the on-site visit as part of their efforts to go above and beyond to protect you and your clients. On-site visits can sometimes uncover important details or concerns that otherwise would have gone undiscovered from a desktop review.

During the assessment, inspectors are looking for specific types of potential concerns or hazards, which are known as recognized environmental conditions (RECs).

These RECs include evidence that potentially harmful chemicals or petroleum products were used on the site and have likely been released into the environment or “pose a material threat” of a future release. A few examples include above-ground or underground storage tanks, such as the kind used by gas stations.

RECs located at adjacent properties will also be documented in the Phase 1 ESA report. During the site assessment, inspectors are required to determine which properties are located within the vicinity of the subject parcel. They will review property records to determine what these sites have been used for.

Understanding RECs and ASTM Standards

Formerly known as the American Society for Testing and Materials, ASTM International is an organization that publishes technical standards for a broad range of services and testing procedures.

ASTM International has published standards governing the process of performing a Phase 1 environmental site assessment. The most current iteration of this standard is ASTM E1527-21.

Among other things, the ASTM identifies potential off-site and on-site RECs. This standard also specifies that assessors should check for certain off-site RECs in a half-mile radius of the subject property. Other REC minimum search distances include the property only – or the subject site and adjoining parcels.

Types of RECs Listed in a Phase 1 ESA Report

When reviewing your Phase 1 ESA report, you may encounter several different types of RECs. General recognized environmental conditions are RECs that have not been previously documented or addressed in a state or federal database.

These RECs will likely need to be remedied before the land is deemed usable for commercial or industrial processes. At a minimum, general RECs will need to be investigated further via a Phase II ESA.

The other two common types of RECs are historical RECs and controlled RECs.

What Are HRECs?

Historical recognized environmental conditions (HRECs) are past releases of petroleum products or hazardous substances that impacted the subject property. HRECs have been previously addressed to the degree that satisfies applicable regulatory requirements.

Simply put, HRECs have been removed or decreased to levels below established thresholds. This remediation means that the land can be used without restrictions.

What Are CRECs?

Like HRECs, controlled recognized environmental conditions (CRECs) have already been addressed by a previous or current land owner. A regulatory authority has confirmed that the issues have been remedied by issuing an NFA letter or other official document.

The difference is that recognized environmental conditions are classified as CRECs when contamination still exists. As a result of this contamination, the land has certain use restrictions.

For example, a regulatory authority may prohibit land owners from constructing residential housing or apartment complexes if certain CRECs are present. Another common CREC limitation is an order prohibiting groundwater from being used for drinking water.

What Happens If RECs Are Discovered?

When reviewing a Phase 1 ESA report, loan officers should pay close attention to which RECs are documented in the findings of the assessment. If HRECs are discovered, no further action is required because the hazards have already been addressed to the degree that makes the land safe for use.

If CRECs are present, you should consider whether the restrictions prevent the buyer from moving forward with their intended use. For example, if a site has use restrictions that prohibit the construction of residential housing and an investor wants to construct townhomes, the parcel may not be the right purchase for that client.

However, the mere presence of CRECs does not mean that the land is completely unviable. Remediation technologies have progressed significantly over the last decade. While previous remediators may have been unable to reduce RECs below established thresholds, modern service providers might be able to achieve more complete site remediation.

Remediation can also be used to remedy newly discovered RECs that have not been previously addressed. This remediation is the process of removing contaminants from soil or groundwater.

There are several different ways in which remediation can be performed. The exact tactics that will be used will vary depending on what hazards are present and where they are located.

Before an environmental services provider can begin remediation, a Phase II environmental site assessment must be performed.

What Is a Phase II ESA?

A Phase II ESA is a more in-depth property analysis than a Phase I ESA. During this assessment, inspectors will collect soil and groundwater samples. The samples are then analyzed in a laboratory to determine what RECs are present and in what quantities.

This type of assessment is required anytime new RECs are discovered because it will reveal whether current contaminant levels exceed established thresholds. If they do, then remediation will be necessary.

Phase II ESAs are not required unless the Phase I environmental site assessment reveals the presence of RECs or, potentially, CRECs. If the initial assessment does not uncover any RECs or only reveals the presence of HRECs, no further action is required.

Why Commercial Real Estate Brokers Should Be Concerned About RECs

Commercial real estate brokers and their clients should be very concerned if RECs are discovered. RECs can have a drastic impact on the viability of a commercial real estate transaction.

Many times, clients may not understand the findings that are documented in the Phase 1 ESA report. Therefore, it is the broker’s responsibility to communicate with the assessment team and keep clients in the loop.

A great Phase 1 ESA services provider will help brokers use the information contained in the report to protect buyers during commercial real estate transactions.

If RECs are discovered, clients need to know before moving forward with the transaction. Additional site analysis will need to be performed to reveal what specific conditions are present and determine whether remediation is necessary. Remediation services can be quite costly and could negatively impact a client’s return on investment.

By knowing what to look for in a Phase 1 ESA report, brokers can help their clients make smart purchasing decisions by ensuring that buyers avoid taking on too much risk. Site analysis is a great way to assist buyers in getting a fair deal on sites that will potentially require remediation.

How to Book a Phase I ESA

When scheduling a Phase 1 ESA, it is critical that you choose the right partner to provide these important services. RSB Environmental is that partner. 

At RSB Environmental, we understand that commercial real estate transactions are time-sensitive deals. With that in mind, we strive to schedule and perform Phase 1 environmental site assessments with lightning-fast efficiency.

Whereas many companies may take multiple weeks to complete your assessment and provide you with a Phase 1 ESA report, we can offer turnaround times of just 7-10 business days.

Additionally, we will take the time to explain our findings to you and your clients. We want to empower you to make smart decisions by providing you with all pertinent due diligence data.

Whether you need a Phase 1 ESA or require a Phase 2 ESA, schedule a consultation with RSB Environmental. We look forward to supporting your commercial real estate deals.