A Phase I Environmental Site Assessment (commonly referred to as a “Phase I”) can be as important as a title commitment for the purchase or financing of industrial, retail and vacant land commercial real estate properties.  The reason is that, under certain circumstances, the owner of a property with environmental contamination may be liable to agencies of the state or federal government for costs to remediate the contamination even if the current owner did not cause the contamination. Clean up costs may run to hundreds of thousands of dollars – not a happy unexpected issue for a property owner or lender.

First – what is a Phase I?  This report, which must be done by a qualified environmental engineer, consists of a review of various data bases and historical records looking for any potential contamination of the property in question. This research also includes a site visit by the environmental engineer and a questioning of the current owner of the property. Potential sources of past contamination include dry cleaning operations, gas stations, auto repair, printing, and certain types of manufacturing. Although not technically part of a Phase I, these reports frequently discuss the presence of asbestos, lead based paints, mold and quality of the drinking water from wells on site. After completion of the historic research and site visit the environmental engineer prepares a report on the property which will discuss any recognized environmental conditions (called RECs) that are found on the property.

If the buyer or lender on this property has ordered and received a Phase I report prior to the purchase or loan against the property, then the owner/lender may qualify for the “Innocent Landowner” defense. This legal term means that the property owner or lender did sufficient due diligence into potential environmental issues on the property. If environmental issues subsequently are discovered this due diligence may protect the new owner from liability for the cleanup costs. This is a complicated legal issue, and any reader of this blog should consult with their own legal counsel to be sure they understand the issues involved with this type of issue.

Some buyers and some lenders are willing to take a chance on environmental liability and do not require a Phase I prior to buying or lending on a property. Other buyers and lenders would not proceed without a Phase I. It depends on their risk tolerance criteria. Montegra typically requires a Phase I on commercial properties that may have potential environmental issues.