Are you about to purchase a commercial property, but not sure if it requires a Phase I Environmental Site Assessment (ESA)? Lenders, and prospective property buyers, must gauge the cost of a Phase I ESA versus the probability that an environmental issue exists, which could negatively affect the value of the property. Federal regulations do not require that a Phase I ESA be conducted on every commercial real estate transaction.
However, CERCLA liability protection (see Top 5 Reasons Banks Require Phase I Environmental Site Assessments) is only afforded when such assessments are initiated prior to the purchase of a property. Property use and history of use dictate whether or not a bank will require a Phase I ESA before offering a loan. If paying cash, a prospective buyer should also consider these same conditions in deciding to conduct a Phase I ESA. Since everyone’s risk tolerance is different, there are some gray areas. There are also some occasions where a Phase I ESA is clearly warranted.
Current Use of a Property is used to Gauge the Need for a Phase I ESA
A Phase I ESA should always be obtained if:
- The business sells, supplies, or dispenses fuel, gasoline, heating oil, and other hazardous materials.
- If there are actual or suspected hazardous substances on the property (or in the subsurface soil and/or groundwater), either from current, past, or future activities on the property itself, or current or past activities on surrounding properties.
- There is a known or potential threat to the environment or potential exceedance of any cleanup standard.
- There is an issue that has been, currently is, or will potentially become the subject of an enforcement action under Federal or state laws, especially cleanup-related and waste-related state laws.
Property History is used to Gauge the Need for a Phase I ESA
A Phase I ESA should be conducted if a property has been used for an environmentally-sensitive industry or is in close proximity to a business in an environmentally-sensitive industry.
Examples of Potential Environmentally-Sensitive Industries:
- oil & gas extraction
- mining (except oil & gas)
- support activities for mining
- heavy & civil engineering construction
- food manufacturing (if underground fuel tanks present)
- beverage & tobacco product manufacturing
- textile mills (not required if sewing, weaving, or hemming only)
- textile product mills (not required if sewing, weaving, or hemming only)
- leather & allied product manufacturing
- wood product manufacturing (if finishing occurs on site)
- paper manufacturing
- printing & related support activities
- petroleum & coal products manufacturing
- chemical manufacturing
- plastics & rubber products manufacturing
- nonmetallic mineral products manufacturing
- primary metal manufacturing
- fabricated metal product manufacturing
- machinery manufacturing (not required if assembly only)
- computer & electronic product manufacturing (not required if assembly only)
- electrical equipment, appliance & component manufacturing (not required if assembly only)
- transportation equipment manufacturing
- furniture & related manufacturing (if finishing occurs on site)
- miscellaneous manufacturing (only required if hazardous materials are involved)
- automobile & other motor vehicle merchant wholesalers (if service bays present)
- motor vehicle parts (used) merchant wholesalers
- metal & mineral merchant wholesaler
- recyclable material merchant wholesaler
- chemical & allied products merchant wholesalers
- petroleum & petroleum products merchant wholesalers
- motor vehicle and parts dealers (if service bays present)
- gasoline stations
- fuel dealers (not required for propane or firewood dealers)
- air transportation
- rail transportation
- pipeline transportation
- truck, utility trailer, and recreational vehicle rental & leasing (if repairs, maintenance or vehicle washing are performed onsite)
- construction, transportation, mining & forestry machinery & eq
uipment rental & leasing (if repairs, maintenance or vehicle washing are performed onsite) - other commercial & industrial machinery & equipment rental & leasing (if repairs, maintenance or vehicle washing are performed onsite)
- testing laboratories
- exterminating & pest control
- waste management & remediation services
- general medical & surgical hospitals (if fuel tanks are present)
- golf courses & country clubs
- skiing facilities
- marinas
- recreational vehicle parks & recreational camps (if fuel tanks are present or if vehicle repairs or maintenance is performed onsite)
- automotive repair & maintenance
- electronic & precision equipment repair & maintenance (not required if assembly only)
- commercial & industrial machinery & equipment repair & maintenance
- death care services
- laundry & dry cleaning services (if dry cleaning operations on-site)
- photofinishing laboratories (except one hour)
Special Use Facilities
Prudent lending practices dictate that specific additional environmental assessments be performed that are outside the normal scope of a typical Phase I ESA for certain special use facilities. For example, property constructed prior to 1980 that will be used for daycare or child-care centers or nursery schools should undergo a lead risk assessment (for lead-based paint) and testing for lead in drinking water. Individuals living in residential care facilities constructed prior to 1980 may also be at increased risk for lead exposure and prudent lending practices dictate that these facilities also undergo a lead risk assessment.
Due diligence and risk tolerance will dictate the need for a Phase I ESA. There are often great bargains to be had when purchasing a property that holds or was previously occupied by an environmentally-sensitive industry. A thorough environmental site investigation may mitigate that risk. In these cases, aPhase I ESA is often not enough and we recommend a much more extensive and targeted investigation of the property called a Phase II ESA. Once the buyer understands the risks, and potential cost, of the environmental impact, the property can be valued accordingly. Check these links for more information on Phase I and Phase II Environmental Site Assessments, or contact us if you have any other questions or concerns!
