The Complete Who, What, Why of Phase I ESAs

 A Phase I Environmental Site Assessment (ESA) identifies the environmental liability associated with a real estate asset.  Lenders require a Phase I ESA during the financing of commercial real estate.   The environmental consultant conducting the environmental site assessment is required to inspect the subject property, review historical records and research records (which are available at government agencies).  The consultant will then evaluate this information to offer an opinion as to whether past or present activities may have caused contamination of the soil or groundwater at the property.

If the Phase 1 ESA identifies a recognized environmental condition (REC)*, the environmental consultant will typically recommend a Phase 2 Environmental Site Assessment, which includes invasive testing of soil or groundwater.   A geologist or engineer will design the Phase 2 Environmental Testing scope of work by relying on the Phase 1 Environmental Report to help them understand Areas and Chemicals of Concern.

ASTM E1527-13

The first ASTM standard was published in 1193 by the American Society for Testing and Materials (ASTM): ASTM E1527-93 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process.   The standard has been updated several times since then, with the most recent update occurring in 2013.  

This latest standard, ASTM E1527-13 outlines the purpose and use of the Phase 1 ESA as well as the scope of work to be conducted, including: records review (historical and governmental records); site reconnaissance (inspection of the property and adjacent sites); interviews (with owners and occupants and local government officials); evaluation and report preparation.  To read about the standard in more detail, have a look at our Globe St posts on the topic - such as this one.

US EPA's All Appropriate Inquiry Standard (AAI)

Real estate buyers are required by Federal law to do “all appropriate inquiry” to qualify for the innocent landowner defense under CERCLA* - a third party Phase I Environmental Site Assessment meets this requirement the all appropriate inquiry standard.  In 2005, the EPA published its final rule on requirements for all appropriate inquiry.   To a large extent the industry quickly adapted the AAI ruling for Phase I ESAs, which went into effect on November 1, 2006. 

The new ASTM E1527-13 standard was recognized late last year as meeting the All Appropriate Inquiry (AAI) requirements.  Although the previous version of the standard (ASTM E1527-05) will technically continue to meet AAI, the -13 version replaces its predecessor as the industry best practice for Phase I ESAs, and the EPA advises partoes seeking claim protection from liability under CERCLA to follow the updated formated. 

ASTM E2247-08

An additional ASTM standard for conducting Phase 1 ESAs was created in 2008 specifically for large tracts of primarily undeveloped land: ASTM E2247-08 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process for Forestland or Rural Property.  The standard is very similar to the E1527 standard, but there are some differences in the approach to site reconnaisance, regulatory records search and historical sources. 

Other Custom Scopes of Work for Phase 1 ESAs

Most buyers must do the Phase 1 Environmental Study for a loan and many lenders and government agencies have developed custom scopes for work for Phase 1 Environmental Site Assessments.   A few examples are below:

SBA Phase 1 Environmental Site Assessments—SBA SOP 5010

The US Small Business Association (SBA) requires an environmental investigation of all commercial real estate loans.  The SBA also has specific requirements for what kind of investigation is required and when. The requirements are based on a property’s environmental risk (determined by its NAICS Code*).  Some of the main particular requirements are: 

• Environmental Questionnaires and/or Records Search with Risk Assessments (RSRAs) are required on “lower risk” sites (no NAICS Code match)
• Higher risk” sites (with NAICS Code matches), must do a Phase 1 to start, except for “Car Wash Only Facilities”, which must do an Environmental Transaction Screen to start
• Requirements for gas stations: Phase 1 and equipment testing compliance review
• Requirements for dry cleaners: Phase 1, and automatic Phase 2 if the facility is 5 years or older
• Requirements for pre-1980 day cares/schools/residential care facilities: lead-based-paint risk assessment and lead testing in drinking water
• Phase 2s on gas stations and dry cleaners must be conducted by an environmental professional with a current professional geologist’s or engineer’s license
• Require the consultant to grant the SBA reliance on the reports

The SBA generally recognizes the ASTM Standards for conducting Phase 1 ESAs.  Each October the SBA releases updates to its operating procedures. 

Fannie Mae Phase 1 Environmental Site Assessments

Fannie Mae has specific requirements for Phase 1 ESAs on its loans, which are detailed in the Environmental Hazard Management Procedures and Sections 209-310 of the Fannie Mae Guide. Fannie Mae generally recognizes the ASTM Standards for Phase 1s with some modifications, the main components of which are:

• Site inspection is required to cover 10% of a property’s units, and 50% of any down units
• Requires testing for asbestos, lead and radon in some circumstances:
• Considers building materials from 1979 or earlier as suspect asbestos-containing-materials (ACM). If consultants suspect ACM, they can either test for asbestos or recommend creating an ACM Operations & Maintenance (O&M) Plan (and assume that ACM is present)
• Requires testing for LBP on buildings constructed before 1978 unless it gives the lender a waiver, in which case LBP must be assumed present and an LBP O&M Plan be implemented
• Requires testing for lead in drinking water when a property has a private, non-municipal water supply
• Leaves radon sampling to the discretion of the consultant; however, it is prudent to conduct at least minimal sampling at properties in Zone 1 radon areas

Freddie Mac Phase 1 Environmental Site Assessments

Freddie Mac environmental assessments are conducted in accordance with the Freddie Mac Multifamily Seller/Servicer Guide and Chapter 14, “Environmental Requirements" as mentioned in my previous Active Rain blog.   Both Freddie and Fannie's environmental guidelines are discussed in far more detail these two articles: Scotsman Guide and Multi Housing News.  Worth a read if you play in this space!

HUD Phase 1 Environmental Site Assessments

HUD requires ASTM Phase 1 ESAs with additional Environmental Reviews (HUD Form 4128), which go well beyond the ASTM requirements. The 4128 Form covers a range of potential impacts of a project including:

• Zoning
• Air quality
• Coastal barrier resources
• Floodplains/wetlands and other natural features
• Historic preservation
• Noise abatement
• Hazardous operations/toxic and radioactive chemicals (determined by the Phase 1)
• A range of other concerns regarding the site location, suitability, stability, social/municipal services and transportation

If a potential issue is identified in the 4128 checklist, then further study may be required, such as formal Noise Surveys for properties in potential high-noise zones (an initial noise analysis is required on all projects). 

During the environmental review process, HUD also goes beyond ASTM by requiring lead paint surveys or Operations & Maintenance Plans (based on the age of the property), and vapor encroachment screenings (for all projects).

Foreclosure Phase 1 Environmental Site Assessments

Phase 1 ESAs done during pre-foreclosure process are similar to normal Phase 1s; however, strict adherence to the AAI/ASTM requirements is critical in order to maintain the secured creditor exemption or innocent landowner defense under CERCLA.  This includes conducting an Environmental Lien and/or Chain of Title search, which many lenders forego at loan origination. Some other concerns to consider:

• Site access can be difficult due to recalcitrant site contacts
• Asbestos, lead paint, radon, mold and other non-scope issues must be managed in order to maintain an assets’ safety and value
•  Erosion control at unfinished construction sites and other compliance concerns (not covered by AAI/ASTM)
• A lender should evaluate any potential environmental liability and cleanup costs in comparison with the asset value when deciding whether to foreclose

Common Scope Additions to our Phase 1 ESAs

ASTM E1527-2005 recognizes several common additional scope items.  In our practice of environmental due diligence, we find that a lot of our clients are interested in investigation other environmental concerns under the cover of the Phase 1 Environmental Site Assessment.   The most commons additional scope items are:

• Asbestos Survey:  an asbestos survey is particularly important to buyers of old buildings or buyers who plan to demolish the buildings;
• Lead Paint Surveys: important in residential settings, for schools, and when a building is going to be demolished;
• Environmental Compliance Audits:  clients buying complex industrial operations are concerned about recognized environmental conditions as defined by ASTM E1527 as well as material non-compliant practices.    A Phase 1 ESA/Compliance Audit is the best way to understand all of the environmental liabilities associated with a manufacturing facility.
• Mold Survey: common for residential and hotels users of our service;
• Indoor Air Quality Survey:  common for high end office buyers and hotel buyers;
• Phase 2 Environmental Site Assessment:  clients buying property with known environmental concerns may want to do the Phase 1 & 2 Environmental concurrently.

Definitions

*A Recognized Environmental Concern (REC) is one of the terms used to identify environmental liability within the context of a Phase I Environmental Site Assessment. ASTM defines the recognized environmental condition in the E1527-13 standard as “the presence or likely presence of any hazardous substances or petroleum products in, on, or at a property: (1) due to release to the environment; (2) under conditions indicative of a release to the environment; or (3) under conditions that pose a material threat of a future release to the environment. de minimis conditions conditions are not recognized environmental conditions.”

The E1527-13 standard modified the Recognized Environmental Condition definition from that within the previous E1527-05 version, with the intention of making it clearer and simpler to understand.

* A Historical Recognized Environmental Condition (HREC) refers to a past release that has been remediated to below “residential” standards and given regulatory closure with no use restrictions. HREC is defined by ASTM in the E1527-13 standard as “a past release of any hazardous substances or petroleum products that has occurred in connection with the property and has been addressed to the satisfaction of the applicable regulatory authority or meeting unrestricted use criteria established by a regulatory authority, without subjecting the property to any required controls (for example, property use restrictions, activity and use limitations, institutional controls, or engineering controls).”

The HREC category is distinct from the Controlled Recognized Environmental Condition (CREC), which applies to sites that have received regulatory closure but are still subject to controls.  The determination of whether an environmental condition is a recognized environmental condition (REC), CREC or HREC lies with the environmental professional, and depends upon how the condition impacts the current or future use of the property.

* Controlled Recognized Environmental Condition (CREC) is a new term introduced in the ASTM E1527 standard for Phase I Environmental Site Assessments (ESAs). The Controlled REC concept was introduced to address contaminated sites that have received risk-based regulatory closure, where no further remediation is required but residual contamination still exists at a site and the property is subject to some sort of control or use restriction. 

The ASTM definition of CREC in the E1527-13 standard is as follows: “a recognized environmental condition resulting from a past release of hazardous substances or petroleum products that has been addressed to the satisfaction of the applicable regulatory authority (for example, as evidenced by the issuance of a no further action letter or equivalent, or meeting risk-based criteria established by regulatory authority), with hazardous substances or petroleum products allowed to remain in place subject to the implementation of required controls (for example, property use restrictions, activity and use limitations, institutional controls, or engineering controls).” 

*CERCLA stands for Comprehensive Environmental Response, Compensation and Liability Act, commonly known as the Superfund law

* An Environmental Professional is someone qualified to conduct and/or supervise a Phase I Environmental Site Assessment, based on experience and education requirements. An Environmental Professional or "EP" must possess sufficient knowledge and experience to exercise professional judgment, appropriately evaluate risks and form conclusions regarding conditions indicative of releases or threatened releases at a property. The requirements for an Environmental Professional include:

*NAICS Code: North American Industry Classification System. The SBA maintains a list of NAICS Codes of environmentally sensitive industries.