Phase I Environmental Site Assessment (ESA) Overview for Inspectors

What Is a Phase 1 Environmental Site Assessment?

A Phase I Environmental Site Assessment (ESA) is a crucial part of the environmental due diligence process in commercial real estate transactions. It is the first step in identifying potential environmental risks associated with a property. While primarily conducted for commercial properties, ESAs may also be performed on residential sites, but this is done typically during the development stage rather than during a transaction.

The purpose of a Phase I ESA is to identify recognized environmental conditions (RECs) in connection with a property. This process includes an environmental professional (EP) reviewing site records, performing an on-site inspection, interviewing people with the most knowledge of the property, and the production of a report.

Phases of an ESA

Within the realm of an ESA inspection, there are three different types or categorized phases, including:

• Phase I ESA: Research and observational analysis to identify potential environmental concerns.
• Phase II ESA: Physical testing of the property, such as soil and groundwater sampling.
• Phase III ESA: Remediation or mitigation of identified environmental hazards.

The Phase I ESA Process

A Phase I ESA begins with an EP requesting and reviewing government environmental records and other historical use documents. This process can take days, weeks, or even months, as documentation may include:

• historical aerial photos;
• reverse street directories;
• building permits;
• title information;
• fire department records;
• topographical maps;
• planning records;
• floodplain maps;
• oil and gas maps;
• environmental monitoring or enforcement activities;
• investigations or claims that have occurred on or near the site; and
• any other information or potential evidence related to possible environmental concerns.

Once the research is completed, the EP conducts interviews with property owners, tenants, and people with the most knowledge of the property to further develop a comprehensive history of the property. These interviews can also help identify past uses that could have contributed to current environmental concerns.

Next, the EP performs an on-site inspection of the property, as well as adjacent properties, to look for visual signs and provide photo-documentation of potential contamination, such as:

• evidence of buried tanks;
• contaminants on the surface of the soil;
• sick or dead vegetation;
• potential water runoff areas;
• discolored or polluted water;
• maintenance practices and hazardous materials-handling procedures; and
• any storage of significant quantities of potentially hazardous chemicals.

If no significant environmental concerns are identified, the Phase I ESA concludes with a report confirming that no further action is needed. However, if potential concerns (referred to as RECs) are found, Phase II and III ESAs may be required.

The Role of the Report User in a Phase I ESA

In a Phase I ESA, the report user plays a key role in the process. To qualify for legal protections, such as the “innocent landowner defense” (ILD) and Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, also known as the Superfund), the user must provide certain disclosures and actively participate in the due diligence process with the EP.

The report user is the party requesting the environmental assessment, which may include the:

• prospective buyer of the property;
• prospective tenant of the property,
• the owner of property;
• a lender; or
• the property manager.

To maintain eligibility for environmental liability protections under federal law, the report user’s responsibilities include providing the EP with the following:

• environmental liens and activity and use limitations (AULs) found in the title and judicial records;
• commonly known information within the local community about the property;
• specialized knowledge or experience relevant to the RECs;
• the relationship between the purchase price and the property’s fair market value, if uncontaminated; and
• the reason for commissioning the Phase I ESA.

For buyers and lenders, meeting these requirements is essential to securing legal protection from CERCLA cleanup liability. The ILD is one of CERCLA’s liability protections that allows property owners to avoid responsibility for contamination they did not cause, if they conducted appropriate due diligence before acquisition. Without a Phase I ESA and full user participation, a property owner could be held liable for costly environmental remediation, even if they didn’t cause the contamination.

Who Needs a Phase I ESA?

Buyers seeking financing to complete the transaction are usually the parties who require a Phase 1 ESA. Lenders require assurances that the property is free from environmental risks that could complicate resale in the event of foreclosure. As a result, a Phase I ESA is typically mandated by lenders, with the buyer covering the cost. The average price for a Phase I ESA can range from $2,000 to $4,500.

The Phase I ESA provides all parties involved in the transaction with a clearer understanding of any potential environmental issues. For example, the property in question might be a vacant piece of land or a lot with a small office building. However, it may have previously hosted a gas station several decades ago. Without this assessment, stakeholders would remain unaware of the two buried gasoline tanks on the property. The lending institution will not approve a loan for the property until these tanks are removed and the soil is certified as uncontaminated. The costs for tank removal may be borne by the buyer, the seller, or both under the agreed-upon due diligence and transaction terms.

Without a Phase I ESA, this environmental issue could go undetected for years. However, when these problems eventually surface, the financial responsibility would fall on the property’s current owner and not necessarily the original polluter, due to the aforementioned environmental regulations.

A Phase I ESA should be conducted before acquiring a property to secure legal protection from environmental liability and, if applicable, may qualify the buyer for grant programs that support assessment and remediation. To maintain eligibility for these protections, the environmental assessment is typically required to be conducted or updated within 180 days before acquisition. The main federal grant program is the Small Business Liability Relief and Brownfields Revitalization Act.

Who Can Perform These?

A qualified EP conducts a Phase I ESA, following ASTM Environmental Site Assessment Standard Practices for the Phase I Site Assessment Process (E1527), in compliance with U.S. EPA requirements. Lenders may have their own specifications for acceptable reports, as these assessments require specialized knowledge. In most cases, Phase II and Phase III ESAs also require professionals with EPA-recognized certifications.

Where Do Commercial Property Inspectors Fit into the Process?

Commercial property inspectors can be involved in a Phase I ESA in several ways, depending on their expertise, business model, and relationship with environmental firms. Not every client may be aware of what a Phase I ESA inspection and assessment provides, and a commercial property inspector could be that educational conduit that informs their client about the necessity. The client might see the property’s current condition without knowing its actual history.

Here are two common approaches commercial property inspectors may take:

• Partner with an environmental firm. Some inspectors establish partnerships with environmental consultants and assist with the on-site inspection portion and provide photo documentation for the firm’s final report. In this scenario, the inspector does not perform the ESA personally but supports the EP’s assessment by documenting property conditions, site features, and potential concerns. This can be a seamless way to expand services without assuming full responsibility for the ESA through oversight by the environmental firm.
• Contract the service directly to the client. A commercial property inspector can offer ESA services as part of their business model by subcontracting an environmental firm to perform the assessment. In this setup, the inspector manages the client relationship and acts as the primary point of contact, while the environmental firm handles the entire ESA process. The inspector may choose to remain hands-off or coordinate aspects of the site visit to streamline reporting for their client.
• Get trained and offer the service themselves. With the proper training and qualifications, inspectors can perform Phase I ESAs independently. This route allows inspectors to take full ownership of the process and add an in-demand, specialized service to their offerings. It requires a solid understanding of environmental regulations, ASTM standards, and report writing.

These partnerships benefit all parties. As the EP gains field support, the inspector expands their services and offers added value to their clients. Additionally, some EPs provide training to help inspectors integrate Phase I ESA tasks into their inspection process.

Summary

Over time, commercial properties may undergo multiple ownership changes and various uses, which can leave behind environmental impacts. These transitions can leave environmental footprints on the property that only trained professionals can accurately identify. Understanding the three different phases of assessments can equip commercial property inspectors to serve as a more knowledgeable consultant for their clients. While commercial property inspectors may not provide this specialized service themselves, collaborating with experts will allow inspectors to bridge the gap between their clients and environmental due diligence. For additional information, check your city, state, or AHJ’s website for downloadable Phase I ESA checklists.