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You’re on the Hook: The Value of a Phase I Site Assessment

Simply put, as the owner of a piece of commercial property, if it’s contaminated, you’re on the hook.

In other words, by virtue of owning a property at which environmental contamination exists, the owner becomes responsible for dealing with the contamination.

Thus, the value of proper and adequate Phase 1 Environmental Site Assessment in your commercial development process.

Phase 1 (Environmental Study)

The main purpose of this report is to ensure there is no soil or groundwater contamination from previous use or neighboring sites. Any contamination in these reports may impact the property’s value or limit its use.


>>Learn more about how Phase 1 Environmental Assessments fit into the commercial development process

Let’s look at some reasons why Phase 1 studies are so important in the commercial real estate development process.

 

Protect from CERCLA liabilities

The federal Comprehensive Environmental Response Compensation and Liability Act (CERCLA) notes that the property owner is responsible for any contamination at that property – period. CERCLA has been one of the major driving forces behind buyers conducting environmental due diligence in real estate transactions. These are serious regulations and liability impacts can be huge.

 

What Was Once Clean, Is Now Dirty

Phase 1 assessments are written to a standard called ASTM E1527-13, which was revised in 2013. Where previous site assessments focused primarily on soil and groundwater contaminations, this revision took into account vapor intrusion or vapor encroachment.

And as states began to implement these new regulations, existing sites that may have once been clean may now be considered dirty. “Even with a closure letter, new standards may subject your site to a regulatory reopen,” says Kathryn Peacock, National Client Manager for Partner Engineering and Science, Inc.

Additionally, new regulations are also playing a factor in new development. Stricter requirements can result in projects being held up for months due to additional testing, or even seasonal interval testing which can span 4 to 6 months.

 

They Apply to the “Site” Operator too

Furthermore, these legal principles also apply to the site “operator” – so a tenant (lessee) can also be held responsible for contamination at a property in the same manner as an owner.

Under the federal Superfund statute “current operators” of facilities are liable for contamination that predates their occupancy. Also, lessees with sufficient control over the leasehold can be deemed “current owners” of the facility, and “current owners” are also generally liable.

 

Necessary to Construct a Timely, Safe, Cost-Effective Project

Both an adequate site investigation and a comprehensive geotechnical report are necessary to construct a safe, cost-effective commercial development project.

As for geotechnical reports, they act as the basis for much of the design criteria for a new commercial development. Without the use of a geotechnical report, engineers will have to make assumptions for the design criteria of the onsite soils.

“Ultimately, being proactive in performing a Phase I should provide enough lead time to keep projects on a reasonable time table,” says Peacock. “On top of that, performing the assessment will help you avoid future property devaluation and reputational risk.”

 

Lender Required

Most commercial lenders require at a minimum a transaction screen or a “Phase I” Environmental Site Assessment (ESA). The Phase I was primarily performed for the protection of the banks, who were concerned that if they loaned money for a contaminated property they may be held liable for the site cleanup.


No buyer should ever perform a Phase I merely to “check off a box” on the due diligence checklist and proceed with the purchase or loan in spite of potential issues. While the process means upfront cost and time added to your project, if you’re proactive in your approach, you can save yourself from serious regulatory and legal ramifications.

Tags: Commercial Real Estate Development Process

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