You are looking at purchasing a commercial property. Maybe it’s for the burgeoning cannabis market or you’re relocating your manufacturing company. Whatever the reason, your legal counsel, your bank, or other advisor has suggested, or is requiring, that you conduct environmental due diligence on the property/building you are considering. Your first question might be what is environmental due diligence (commonly called a Phase I Environmental Site Assessment [ESA])?
When you are looking at purchasing commercial property, a lot of factors need evaluating before you invest. These factors (“due diligence”) may include the location, the building and property condition, the potential for growth and appreciation, and, if it’s an existing business, you look at “the books.” These are all tangible items you can evaluate, and based on your experience and knowledge, hopefully make a sound financial decision.
Unseen Potential Environmental Liability
Environmental due diligence does something similar. It looks at what is, for the most part, potentially unseen environmental issues (possible risk). As you can imagine, these can include some potential, high-liability costly issues.
The approach to the Phase I ESA is somewhat prescribed by environmental regulations and, in some cases, the lender. However, like any other professional service, it’s the experience and knowledge of the person executing the prescribed list that provides a more robust evaluation.
As an aside and without trying to sound self-serving, we were asked to consult with at least two clients recently where the Phase I ESA (conducted by another consultant) was far less than robust. In one case, an underground storage tank (UST) was missed, causing expense and headaches to the owner. Thankfully, the costs were relatively minor, but it took months to resolve. In the second case, the consultant missed a significant contamination issue that will cost hundreds-of-thousands of dollars to address. Litigation on this project is pending.
Phase I ESA: What Should You Expect?
If you retain a consultant, the necessary steps in a Phase I ESA include:
- Information providing historical and environmental data from the site and the surrounding sites from the past several decades.
- A site inspection and interview of key contacts at the site.
- A report informing you what (if any) potential environmental issues may be associated with the site.
Environmental due diligence may result in finding no environmental issues (called Recognized Environmental Conditions or RECs). However, when issues are identified, sometimes we are able to “write away” some of these issues when conducting the robust Phase I ESA (versus simply following a checklist) to avoid a Phase II ESA (note: we will not cover the Phase II ESA process here).
Historical Environmental Contaminants
What types of issues can be found during the Phase I ESA that would be of concern? There are a number of issues that may come up. Below are a few “unseen” examples.
- USTs hidden under pavement, landscaping, buildings, etc. In some cases, the USTs are full of product.
- Fill material that may have been accepted decades ago from old foundries or other industrial sites that could contain contaminants.
- Adjacent or nearby sites that had a chemical spill that migrated and is on the site you are considering. This can cause future, increased development costs or potential health liabilities.
- The site may be listed with the state or federal government as a site of known contamination from historical operations (this is a “seen” item if you know where to look).
- The presence of an emerging contaminant (e.g., per- and poly-fluoroalkyl substances [PFAS]). Emerging contaminants such as PFAS would not likely be included in previous evaluations at the site.
With respect to that final bullet (PFAS), we still lack federal guidance, but some states have enforceable limits. Further, the issue of emerging contaminants is why (1) you have to keep a pulse on environmental issues and (2) you take the time to retain a good team of environmental advisors (legal and technical).
As stated above, we are not addressing the Phase II ESA in this blog, but we will cover it in a separate blog. Suffice it to say that if an environmental issue is discovered in the Phase I ESA that cannot be “written away,” sampling and analysis are likely required to quantify the potential issues of environmental liability and risk.
Potential Phase I ESA Outcomes
The outcome of a Phase I ESA can be (1) no environmental issues, (2) environmental issues that have been written away, (3) environmental issues that require additional investigation, or (4) enough information that you decide to “walk away” from the site.
Protecting you, your company, or even your family (depending on the structure of your company) from issues of environmental liability is critical.
If I were to leave you with one piece of advice, it would be this: make sure you have a group of trusted environmental advisors, legal and technical.
If you have any questions or if you are looking for a technical advisor to assist you, feel free to contact me at 248-932-0228, Ext. 133
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