The importance of a Phase 1 ESA prior to land purchase or building development is that the report identifies potential environmental liabilities associated with the subject property. The Phase 1 report also protects the buyer or seller from unexpected expenses and legal issues due to contamination on the subject property. A Phase 1 ESA allows the client to make an informed decision on the subject property prior to buying or selling the subject property.

When selecting a new project, either a residential, commercial, or large-scale land development, environmental due diligence, specifically a Phase I Site Assessment, is a critical step in choosing the right property.

Developers, investors, and users may focus on the location, the structural integrity of the building, or the value of the commercial property, but performing the appropriate environmental due diligence is not only a vital piece of the due diligence pie, but it can also be the most important.

The Level 1 Environmental Assessment can play a vital role in saving you time and money and, having the right company performing this assessment can provide the decision-makers with crucial pieces of information required to make the right decisions before it is too late.

3 Reasons to Conduct a Phase I Environmental Site Assessment

• To identify environmental risks and liabilities associated with the subject property.
• To meet the requirements for Regulatory Compliance and Liabilities prior to a property transaction or refinancing.
• The report protects the clients financial interests by identifying any potential contamination of concern at the subject property.

1. Business Risk

If contamination exists in the property in the form of soil and groundwater contamination, and it is brought to the regulatory body’s notice. environmental remediation of the contamination can cost from thousands to millions depending on the area and extent of the contamination. The issues that are identified by a Phase I Site Assessment include past and present gas stations, dry cleaners, and industrial processing plants. It is prevalent that the current property may not pose any environmental risk, but its past usages may have caused environmental damages. For example, the existing property is a restaurant but was a gas station in the past. The existing property has various shops but a dry cleaner may have operated on the existing property. If a Phase I Site Assessment is carried out properly, it should be able to discover such issues and appropriate mitigation measure can be taken after carrying out Phase 2 Environmental Site Assessment.

2. Lender’s Requirements

Phase I Environmental Assessments are not required for every commercial real estate transaction, but they are most needed when a lending institution is involved. Lenders mostly need it before they process a loan for a commercial property. They do that to ensure that any hidden contamination does not affect the value of the property, and also it can affect the borrower’s ability to repay the loan. Lender’s risk is if the borrower fails to pay the mortgage on a commercial real estate property and the bank has to foreclose that property, then they are not foreclosing on a contaminated property. It is tough to sell contaminated property.

Read Also: A Phase 1 Environmental Site Assessment Cost Estimator

3. Lenders/prospective buyers may need one

If a buyer purchases a property by cash and then he may not feel the need for doing a Phase I ESA. But while selling the prospecting buyer may need financing hence, he needs a Phase I ESA. In that scenario, if the property has contamination, then the seller is now liable for that contamination issue. In such a case, the financing of the property is challenging, and the seller will find it extremely difficult to sell the property without removing the contamination and getting a closure letter from the regulatory authority. This process is not simple and may take years to get a closure letter before the seller can sell the property.

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4. Environmental Damage

It is not the end of the world for a property owner if he finds that the property is contaminated. The property can be re-mediated under the regulatory body’s oversight, and it can be bought or sold once there is a closure letter from the respective regulatory authorities. The purchaser may want to get a Phase 2 Environmental Site Assessment to establish the cost of remediation, and based on the price, the buyer can negotiate with the seller and ask for a discount. When the contamination is discovered, the purchaser is in a much better position and may decide to either purchase the property at a discounted rate or completely walk away from the deal. A prospective buyer must carry out the environmental due diligence to mitigate the risk of buying a contaminated property.

Conducting environmental due diligence will relieve the potential buyer of any environmental liability. That is why it is recommended to do proper due diligence before investing in commercial real estate.

Also Read: How To Choose The Right Location For Your Business

Key Benefits of Conducting a Phase I ESA Before Property Transactions

• Risk Mitigation: The Phase 1 ESA provides the information needed to determine if potential environmental liabilities are present at the subject property from the surrounding land use.
• Regulatory Compliance and Due Diligence: The Phase 1 ESA reports provide essential information regarding the subject property in accordance with environmental regulations. The report allows a client to protect themselves against potential liabilities associated with the subject property.
• Financial Benefits: The ESA report can enhance the property value and marketability, as the report can demonstrate the quality of the land. Having a clean Phase 1 ESA report can streamline the purchase and financing process. The report also prevents buyers or banks from buying or financing properties with contamination onsite.

5 Steps to Conduct an Environmental Site Assessment Before Buying Commercial

• Background: Gather historical information and review regulations and ordinances.
• Site Reconnaissance: Physically inspect the subject property, taking photographs of subject property, and assessing the surrounding properties.
• Interviews and Documents: Interviewing relevant parties to obtain additional information on the subject property. Reviewing previous environmental repots, land titles, site plans, and other relevant documents.
• Conclusion: compiling and organizing the data to come up with a valid conclusion regarding the subject property. The conclusion needs to summarize the information reviewed and researched.
• Recommendation: Based on the information reviewed in the report regarding the subject property, a decision needs to be made whether a Phase II is required or not and why.

Who Can Perform a Phase I Environmental Site Assessment

A qualified individual with an appropriate accreditation from a recognized institution such as, university or college. The Phase I reports can only be signed by an environmental professional with a stamp.   

Conclusion

The conclusion of the Phase 1 ESA report consists of the summary of the findings of the report, with regard to potential contamination on the subject property.