Why do I need an Environmental Site Assessment?
Environmental site assessments are needed when acquiring all properties, primarily commercial and industrial sites, in order to evaluate the historical use of the property and to determine if there is a potential for hazardous materials use and/or release from the site. Environmental site assessments are completed for commercial, industrial properties, rural and open undeveloped land, multi-family residential properties, and other land to be acquired in a real estate transaction.
The United States Environmental Protection Agency (EPA) enacted the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) in 1980. CERCLA is commonly known as Superfund, and “created a tax on the chemical and petroleum industries and provided broad Federal authority to respond directly to releases or threatened releases of hazardous substances that may endanger public health or the environment.” According to CERCLA, a property owner, property manager, lessor, or lender can be liable, by virtue of property ownership or control, for remediation of hazardous substances in the soil and/or groundwater underlying a site, even if the prior property owner did not cause and/or contribute to the contamination. Completion of a Phase I Environmental Site Assessment represents due diligence and provides an “Innocent Landowner Defense” for a prospective property purchaser or lenders.
What are the standards for conducting a Phase I Environmental Site Assessment?
The scope of work for the Phase I Environmental Site Assessment meets the technical requirements as stated in the American Society for Testing and Materials (ASTM) guidelines published as the Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process (Standard E 1527). The ASTM practice is intended to permit a user to satisfy one of the requirements to qualify for the innocent landowner, contiguous property owner, or bona fide prospective purchaser limitations under the CERCLA liability statute.
In 2021, the ASTM released a new standard entitled “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process” (ASTM Standard E1527-21). The purpose of this practice is to define good commercial and customary practice in the U.S. for conducting an environmental site assessment of a parcel of commercial real estate with respect to the range of contaminants within the scope of Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) (42 U.S.C. 9601) and petroleum products. As such, this practice is intended to permit a user to satisfy one of the requirements to qualify for the innocent landowner, contiguous property owner, or bona fide prospective purchaser limitations under the CERCLA liability statute.
In 2022, the U.S. Environmental Protection Agency (USEPA) also published the final All Appropriate Inquiry (AAI) Rule (40 CFR Part 312), Standards and Practices for All Appropriate Inquiries; Final Rule.” (Read the Final Rule). The AAI standard establishes specific regulatory requirements for conducting all appropriate inquiries into the previous ownership, uses, and environmental conditions of a property for the purposes of qualifying for certain landowner liability protections under CERCLA. Effective February 13, 2023, parties must comply with the requirements of the All Appropriate Inquiries Final Rule, or follow the standards set forth in the ASTM E 1527 – 21 Phase I Environmental Site Assessment Process, to satisfy the statutory requirements for conducting all appropriate inquiries. All appropriate inquiries must be conducted in compliance with either of these standards to obtain protection from potential liability under CERCLA as an innocent landowner, a contiguous property owner, or a bona fide prospective purchaser.
In 2021, the ASTM amended the old 2013 standard to a new standard entitled “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process” (ASTM Standard E1527-21). The changes were largely editorial, and the standard remains substantially the same.
What are the ASTM Standards for conducting a Phase I Environmental Site Assessment?
Since the ASTM standard for conducting a Phase I Environmental Site Assessment is copyrighted, we cannot post a copy here. However, you can read a summary of the standard by clicking the following link http://www.astm.org/Standards/E1527.htm and you can purchase a copy of the standard at the American Society of Testing & Materials.
How long is the Phase I Environmental Site Assessment report good for?
As per the current ASTM standard, a Phase I Environmental Site Assessment report is valid for a period of one year provided that the necessary updates are performed between six months and one year. After one year, the Phase I Environmental Site Assessment report needs to redone.
Are all environmental site assessments the same?
No, not all environmental site assessments are the same. Only a Phase I Environmental Site Assessment prepared under the current ASTM or AAI standard will qualify for the Innocent Landowner defense. In some cases, an Environmental Site Assessment Transaction Screen report may be used to update a recent Phase I Environmental Site Assessment.
What is not included in an Environmental Site Assessment?
The following is not included in an Environmental Site Assessment unless specifically added to the scope of work:
Asbestos Containing Building Materials (ACBM) Lead-Based Paint Lead in Drinking Water Mold Radon Wetlands Threatened and Endangered Species Earthquake Hazard Vapor Intrusion Flood Zones Soil Compaction ReportsHow long will it take to receive my report?
It depends on the location of the property and the cooperation we receive from government agencies and third-parties. In most cases you can expect:
Type of Report Completion Time
Phase I Environmental Site Assessments 10 to 15 Business Days
Environmental Site Assessment Transaction Screens 10 to 15 Business Days
Environmental Transaction Analysis 10 to 15 Business Days
Historic Use Report 3 to 5 Business Days
Records Search with Risk Assessment 3 to 5 Business Days
Environmental Records Research 1 to 2 Business Days
What are the differences between the types of reports?
Site Inspection
Environmental Records Search
Historical Aerial Photos
City Directory Search
Building Permit Search
Historic Fire Insurance Map
Additional State & Local Agency Records Search
Will your report be acceptable to my lender?
In most cases yes. Since each lender has slightly different requirements, you may want to check with your bank representative before ordering a report.
What is the difference between Phase I, Phase II, and Phase III Environmental Site Assessments?
A Phase I Environmental Site Assessment report includes an inspection of the property, historical use research, analysis of local groundwater conditions and a review of nearby sites with environmental problems that might negatively impact the subject property. A Phase II Environmental Site Assessment report consists of collecting soil and/or groundwater samples to determine if significant amounts and concentrations of contaminants exist at the property. A Phase III Environmental Site Assessment is the physical removal or remediation of known contaminants from a site.
Does Orswell & Kasman, Inc. do Phase II or Phase III Environmental Assessments?
No. We believe it is a conflict of interest for the same environmental consulting company to perform the Phase I Environmental Site Assessment and also conduct additional environmental studies for the same project.
Environmental Insurance Policies vs. Phase I Environmental Site Assessment Reports
Several lenders have started requiring borrowers to purchase environmental insurance policies for their commercial property loans, and eliminating the requirement of a Phase I Environmental Site Assessment report. The lenders state that the insurance policy is only about half the cost of the report, and the insurance will cover the outstanding balance on the loan should the borrower default and a significant contamination problem is discovered on the site.
The most serious deficiency of the insurance coverage is that it only offers limited protection for the lender after the purchase of the property has been completed. Even though the cost of the insurance policy is being paid directly or indirectly by the borrower, the borrower receives no benefit or protection from the policy. Assuming the borrower defaults and the property is found to be contaminated, the insurance company will pay off the loan. The borrower will surrender the title to the property to the insurance company, and yet the borrower will most likely be held responsible for the cost of the cleanup, as he failed in his due diligence responsibilities when acquiring the site, and cannot claim to be an innocent landowner.
To make matters worse, the insurance company probably will not take title to the property until it is cleaned up, which may delay the loan payoff to the lender. Picture both the lender and insurance company putting pressure on the borrower to clean up the site, so that they can complete the foreclosure procedures and close the books on the borrower. If the borrower has put all of his savings into the property, he may not have other financial resources to pay for the cost of the cleanup, and he will be unable to obtain an additional loan on the property because the site is contaminated.
And the lender is not without environmental risk either, since there is no protection from the due diligence/innocent landowner defense. The insurance policy is limited to “low risk” properties. Using the scenario that a policy is issued on a small retail center, is the borrower going to be prohibited by the lender from leasing a unit to a dry cleaners or medical clinic to keep the insurance policy in force? The lender’s restrictions may be interpreted by the courts as being involved in the management process and business operations, which could make the lender responsible for the costs of the cleanup under federal law.
The environmental insurance policies are issued upon the completion of a questionnaire within two or three days. This short period would only allow the insurance company enough time to conduct a review of a computerized regulatory agency database report, and make their determination based on the results of the review. The companies that provide database research reports have disclaimers on their reports which state they do not guarantee the accuracy of the information. Over the past 19 years of conducting environmental assessments and investigations in the southern California area, we have learned that the data reported by the regulatory agencies is often not timely or up-to-date, there are problems with geocoding the data due to incomplete or inaccurate addresses, and the identified nearby or adjacent problem sites may not have any affect on the subject property. As a result, the insurance company may increase the premium or reject issuing a policy because of the inaccurate data. Even if there are no reported problems on the adjacent sites, the subject property may be next door to a “high risk” business which could contaminate the property at a later time. Only a site inspection by a experienced and qualified environmental professional can resolve these issues.
Because of the many complex state and federal environmental laws and regulations, most small business owners seek expert and professional advice from attorneys, accountants, and lenders. Owners depend on their professional experience and expertise to provide them with the necessary information to keep their companies in business, and avoid making costly mistakes before they happen. If a lender tells the borrower that an environmental assessment was not necessary to obtain the loan, and that any past environmental contamination problems are covered by an insurance policy, the borrower will probably assume that the property is protected for the borrower’s benefit. After all, the borrower is paying for the cost of the policy.
While conducting environmental assessments on “low risk” properties, in many cases we have discovered previously unknown gasoline stations, underground tanks, waste disposal sites, and latent contamination problems. Without a site inspection and complete assessment report, the borrower and lender do not know if the property was previously used by a “high risk” business.
We realize lenders are looking for ways to trim loan fees and costs, and they are measuring the cost of the environmental insurance policy against the cost of an assessment. The insurance policy may save a few hundred dollars at the time the loan is initiated, however, the policy does not prevent a borrower from losing ownership and being compelled to pay for the cost of remediating contaminated property. A Phase I Environmental Site Assessment Report prepared by experienced professionals provides essential real estate and business information to both the borrower and the lender, and helps establish a legal defense as an innocent landowner.
Does Orswell & Kasman, Inc. carry insurance?
Yes. Each environmental assessment we perform is covered under our extensive insurance policy. Orswell & Kasman, Inc. maintains policies of insurance for Commercial General Liability, Professional Liability, Pollution Liability, and auto insurance each with a liability limit of $2,000,000. In addition, Orswell & Kasman, Inc. carries worker’s compensation, as required by state law.
Do I need to report my findings to the EPA or other government agency?
Unless there is a known threat to human health and the environment, findings and conclusions generated through the Environmental Site Assessment process are not reportable to any governing federal, state or local agencies. Orswell & Kasman, Inc. leaves it up to our clients to properly report any findings to the appropriate regulatory agencies.
