Envirionmental Survey | Real Estate Developm

Environmental Survey

Phase I Environmental Site Assessment (ESA)

A Phase I ESA identifies recognized environmental conditions (RECs) that could negatively impact the value of a property. These assessments will investigate if a site has had, or has potentially had, any problems with chemical or hazardous materials in the past.

During this assessment, an environmental engineer will:

review the current and historical uses of the site
walk the site to see if any potential chemical or hazardous material contaminations can visually be observed
review databases to determine if any aboveground or underground storage tanks on the property have been recorded
interview current and past property owners to see if they are aware of any potential contamination
review fire insurance maps, historical city directories, historic aerial photographs, topographic maps, and title and judicial records

Why Get a Phase I ESA?

You obviously don't want to buy a piece of land that has a verified or potential chemical or hazardous material contamination without knowing it. The land you are buying may look like a grassy field today, but it may have been a gas station that was demolished 20 years ago, with a leaky underground storage tank that was never removed. If you buy this land, you will have additional costs to dig up the storage tank, and to haul off any soil that was contaminated by the leak.

Also, if you are financing the purchase of the land, and/or will be financing the future construction of the building that will go on this land, your bank is going to require that a Phase I be done and no RECs identified.

Phase II ESA

If your Phase I report does identify a REC, unfortunately you will likely have to pay for a Phase II evaluation and report. These Phase II investigations usually involve the environmental engineer taking soil and ground water samples and testing them to see if they contain any contaminants. This usually involves bringing a small drilling rig onto the site. If there are no contaminants in the soil or ground water, you are good to good. If there are contaminants, you have to order a Phase III ESA, which will tell you how to remediate the contaminants.

If you do have contaminants you have to clean up, it is not the end of the world, and your planned development may still be feasible. I have personally developed over 10 free standing emergency centers on old gas stations sites. We had a contractor that would dig up the old underground storage tanks, haul off any contaminated soil, and give us a clean letter from the State for only about $45,000. These development budgets were in the $12 million range, so we could easily absorb $45,000 to get the desirable old gas station sites we wanted.

Timeline & Cost

It takes about 2 - 4 weeks for a company to complete a Phase I, and it costs roughly $2,000 - $3,000. A Phase II usually takes about 4 - 8 weeks to complete and the cost can vary widely, but will usually be in the $10,000 - $20,000 range. That is just the cost for the evaluation and report, not the contaminants cleanup - if needed.

Usually, Phase I's only have a shelf life of 1 year. If a Phase I is over a year old, your bank will want you to get a new or refreshed one. Reach out to the company that did the original Phase I and ask them to renew it. They will do it a lot cheaper than bringing in different company to do a new report.

Also, a Phase I is made out to a specific party, usually that landowner. For a potential buyer (or their bank) to rely on the accuracy of the report, and hold the environmental services company responsible for any inaccuracies or shortcomings with the report, the environmental services company needs to issue that new party a reliance letter - telling that new party they can rely on the accuracy of the report. The environmental services company will usually charge a few hundred dollars for this reliance letter.

Limits of Liability

Some environmental services companies will slip language into their Phase I proposal saying that the limit of liability for their Phase I report is limited to their fee for the Phase I. This is an absurd proposition for environmental services company to try to get by you. This clause basically says that if the report is wrong, and there is toxic waste on the property that the environmental services company missed, and you as the land owner have to spend a bazillion dollars to clean up the mess, you can only seek damages from the environmental services company caped at the fee you paid them for the Phase I report. Since Phase I reports only cost about $2,000 - $3,000, that is a very low cap.

Also, you have to submit your Phase I report to your bank for their review before they will close on your land or construction loan. The bank may pick up on this low limit of liability and require the limit be increased. If this happens, your environmental services company will likely raise their fee for the report, because they have to buy more profession liability insurance, and will simply pass that additional insurance premium onto you.

To be fair, a Phase I investigation is a relatively light evaluation and not exhaustive. There could be a contamination buried on your land, where it would be unreasonable for a Phase I survey to detect. If you had a greenfield property, and someone snuck onto the property at night and buried a drum of toxic waste and covered it up, then vegetation grew over that location, there is no way to reasonably expect an environmental survey to pick that up. Dealing with that situation and paying for the cleanup is simply your risk as the developer.

Example Report

Click here for an example of a Phase I. This example is interesting because it identifies a REC (an old service station with underground storage tank) for a piece of property I was considering buying for the development of a medical clinic. But the REC wasn't even on the subject property. The REC was next to and uphill of the property I was considering buying. And since ground water and potential contamination rolls downhill, this offsite REC negatively affected the property. I ended up having to pay an extra $11,000 for a Phase II, and fortunately there was no contaminated ground water that leaked onto my property.

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