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.