The performance of a complete and thorough and appropriate-to-the-Property Phase I Environmental Site Assessment (ESA) is a critical step in a commercial property finance project.  The applied purposes of Phase 1 projects are to 1) identify recognized environmental conditions (RECs) that require Phase 2 assessment and 2) provide specific details (what contaminants and where) for possible regulatory based subsurface (Phase 2) assessment.

Unfortunately, the fundamental quality of the Phase 1 product appears to have been compromised to a significant extent by a combination of factors.  This conclusion has been supported by a review of recent ESA and Phase 2 reports by ERAS.  Some of the quality problems in these products are so egregious, the real estate lending community must be financially affected.  It doesn’t require special education or training to recognize just how technically flawed and even nonsensical some of the reports are. 

The downward trend in Phase 1 quality appeared to initially begin in California in 2012 when the Registered Environmental Assessor (REA) program was discontinued by the Department of Toxic Substances Control (DTSC).  The website that could be used to evaluate California assessors for quality and to report assessors for their quality of work was discontinued.  Ending the program included the dissolution of the senior higher-level REA II assessor classification for experienced and well-qualified assessors.

The Problems

Following the dissolution of the REA standards program, other factors have also contributed to the drop in due diligence quality as follows.

  1. A race-to-the bottom pricing of ESAs because of larger numbers of contractors since standards were lowered has caused a corresponding lessening of the quality of environmental assessors as many consulting companies cut corners. At the same time the environmental assessment process has become more complex due to evaluation of Vapor Encroachment Condition (VEC) and many nearby contaminated sites closed by the Low Threat Closure Policy (LTCP).
  2. Continuing automation and technological compilation of data provided by environmental database subcontractors for ESA projects has caused a proliferation of misleading information that is subjective and alarming to lenders. An example is the listings of “Cleaners” that include laundromats and non-dry-cleaning locations.  Another example is the listing of auto repair facilities as “Auto Stations” confusing them with gasoline service stations.  This problem is combined with the loss of historical information (see #3 below) that was previously used for corroborating data.
  3. As technology (electronic file retrieval systems) has “advanced” there has been a significant loss of historical file data by cities, counties and the state. Scanning has been done incompetently in many cases, and at some agencies all the historical hazardous materials documents are now missing.  This has led to data gaps that may cause environmental concerns, some real and some imagined.
  4. A lack of understanding of the role of environmental regulations in the due diligence process, especially as pertaining to Phase 2 investigation. Many consultants are failing to properly notify their clients of the implications of Phase 2 investigations which are often based on misleading and over-stated promises.
  5. To cut cost and attempt to simplify the process, many Phase 1 projects are being performed by out-of-area consultants who often fail to review local agency records which is required to meet ASTM standards.
  6. Many lenders and brokers now believe there is a lesser standard for due diligence investigations, particularly for Phase 2 investigations so they can be performed faster and cheaper, often without proper permitting and other regulatory notifications. 

KEY CONCLUSION: The possible environmental impact from operations at gasoline stations can always be evaluated regardless of the subsequent history of uses or new building construction.

A large number of gasoline service stations have historically operated in the United States. The largest number of stations may have been present in the 1950s when gasoline hungry cars became more popular and numerous. In addition, there were many smaller independent oil companies that were competing for consumers at that time.

Leaks from gasoline stations may be the most common type of contamination site and costs for cleanup have exceeded $1-2 millions dollars in some cases. Proposed Phase 2 investigations may be complicated if the stations was removed a long time ago because quality records may not be available, may have been lost or not well preserved. The investigation may be further complicated if the property has been redeveloped with new construction.

Regardless of the circumstances and present configuration, it is necessary to evaluate subsurface environmental conditions at these sites.

Based on historical research, maps, plans or drawings may be available indicating the layout of the USTs and pumps. This is a significant argument for conducting a Phase 1 .

The history of use and development will determine the scope and cost of the required Phase 2 investigation. If scaled maps or plans are not available, the only possible method to determine the former station layout is through historical aerial photographs from the year or years the station is known to have been present on the site. Despite what some may believe, Sanborn Maps do not indicate the complete layout of the gasoline stations, only where the buildings were located.

On some properties the layout of the station cannot be determined from historical sources or the appropriate sample locations may be obscured and covered by newer buildings. In this case, the only practical way to assess subsurface environmental conditions is to determine the groundwater flow direction in the area of the Property. This is also often determined through a Phase 1 ESA but with new on-line resources, it may only require only a quick review of nearby leak site groundwater information. Borings can then be drilled down-gradient of the former USTs, pumps and auto repair facilities and groundwater samples collected for appropriate analyses.

Key Conclusion: The least expensive Phase 1 project may not provide all the information necessary to evaluate the environmental risk at a Property. This could end up costing the user much more than expected if additional investigation is recommended.

Phase 1 investigations are an important first step to determine the financial risk of environmental contamination at a Property. Risks to a Property vary widely depending on factors such as

  1. size and complexity
  2. age of development
  3. historical uses
  4. nature of surrounding area

The Phase 1 must be done completely and accurately to reach proper conclusions and thus the efforts to complete a proper Phase 1 vary significantly.

There has been a trend of downward price pressure for Phase 1 projects. This is partly a result of competition and also a result of the trend toward digitization of records and on-line accessibility of records which makes research less costly. Users should understand the Phase 1 risk assessment process provides justification for further investigation and the project scope should never cut corners. Seeking the lowest price often turns out to be a case of “you get what you pay for”. The proper effort and corresponding cost for a proper risk assessment is a worthwhile investment. Too many consultants have a race-to-the-bottom approach and many do not take the effort to perform all the research necessary. Often these “gaps” lead to recommendations for unfocused random and risky Phase 2 projects (see Phase 2 article in this newsletter).

Recommendation - ERAS recommends users of Phase 1 reports ensure that all ASTM-required sources of information have been reviewed. This is especially important if Phase 2 recommendations are made. Contact ERAS for a free initial review of your Phase 1 report.

After 8 years, the American Society of Testing and Materials (ASTM) will be issuing a new standard for conducting Phase 1 environmental site assessments.

Preliminary information indicates the written standard will be issued in the first quarter of 2014 and incorporates almost the entire previous E1527-05 standard without significant changes.

A new category of recognized environmental condition a CREC (conditional recognized environmental condition) will be added to reflect situations such as a former gasoline station that has been closed with a deed restriction because residual contamination is present.
Details and information about E1527-13 to come in a future newsletter after the new standard is issued.

KEY CONCLUSION: Recent requirements make it much more difficult to finance properties contaminated from off-site sources. There have been recent developments in requirements for financing of properties contaminated from off-site sources.

In the past, there have been lending institutions that have financed properties that were known to be contaminated if it could be conclusively determined the subject property itself did not contribute to the underlying contamination. SBA loans could be obtained for off-site contamination with an appropriate “comfort letter” from the local regulatory agency. In this case, a Phase 1 report would be submitted to the agency who could then agree in writing the subject property itself did not contribute to the contamination underlying it.

In ERAS recent experience, many of the banks and lending institutions are not financing property that is known to be contaminated from any source, even from off-site. There are no significant changes to the requirements for SBA. However, the regulatory agencies are more often asking for expensive Phase 2 investigations to demonstrate or verify the Property is contaminated and whether it has contributed to the contamination.

Most likely, the agencies are requesting this because 1) they have no funding and many responsible parties are not investigating their sites due to their own lack of funds and 2) due to budget cuts which does not allow the time to prepare comfort letters. Beside the cost to the owner, there is also potential financial liability if there are “skeletons in the closet” (unknown contamination) associated with the Property itself ERAS is currently working with several regulatory agencies to provide comfort letters for properties impacted by solvents in groundwater from off-site sources. Some of these sites have the potential to have contributed to the contamination due to past uses. ERAS recently has even been asked to write the comfort letter to be approved by the local regulators. Note that the comfort letter process is extensive but once issued, there is little risk of future liability for the current or previous owners.