(The following answers are intended to be summaries to allow readers to get a general understanding of how the site assessment process works, particularly in Michigan.  The following comments are not to be construed as legal advice.)

Q:  What is a Phase I Environmental Site Assessment (ESA)?

A:  A Phase I ESA is a non-intrusive (usually no soil or groundwater samples are collected) assessment of the existing conditions, the historical use of the Subject Property, and the known sites of environmental concern in the vicinity of the Subject Property.  The Phase I ESA generally includes a walkover to assess current conditions, a review of various historical sources, a search of governmental databases of sites of known environmental concern, and interviews with various local and state governmental agency personnel.  If sites of known environmental concern are identified in the vicinity of the Subject Property, a review of available environmental records for the identified sites may be appropriate. 

 

Generally, under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), purchasers and lessees of environmentally contaminated Property were historically jointly and severally liable for the contamination associated with the Property unless they performed “all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice” as defined in USC § 9601(35)(B), and had no reason to suspect the Subject Property was contaminated.  The purpose of the Phase I ESA was to meet the “all appropriate inquiry” requirement of the CERCLA “innocent landowner” defense.  Over time, Phase I ESAs have become a tool for the assessment of business risks associated with environmental contamination, as well as a tool for addressing potential CERCLA liability.  In Michigan, Part 201 of Public Act 451, 1994, as amended (Part 201), states that individuals who acquire Property after June 5, 1995 (or March 6, 1996 for some sites) could be held strictly liable for contamination present on that property unless they perform “all appropriate inquiry” and, if necessary, a Baseline Environmental Site Assessment. 

 

The American Society for Testing and Materials (ASTM) has developed Standard E 1527-05 for Phase I ESAs entitled “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process.”   Generally, a Phase I ESA should be performed in accordance with the ASTM standard.  However, if a lender or governmental agency (i.e., HUD or MSHDA) is requiring the performance of a Phase I ESA, additional requirements may apply.  Many banks and governmental agencies have developed Phase I ESA standards similar to the ASTM standard with modifications such as limited asbestos assessments, lead-based paint assessments, expanded search radii for sites of known environmental concern, or specific historical research requirements.  Your environmental consultant should inquire who will be relying on the Phase I ESA in order to provide you with a scope of services that meets your needs.  If recognized environmental conditions (RECs) are identified during the performance of the Phase I ESA, your environmental consultant may recommend the performance of a Phase II ESA.

 

Q:  What is a Phase II ESA?

A:  A Phase II ESA consists of those activities performed to assess the potential adverse impact associated with the RECs identified during the Phase I ESA.  The scope of services for a Phase II ESA is usually dependant upon the findings of the Phase I ESA.  A Phase II ESA Scope of Services may include the collection of soil or groundwater samples for laboratory analysis, geophysical assessment of areas of concern (i.e., a ground penetrating radar survey), test pits, or the collection of surface water samples.  Generally, the Phase II ESA will be used to confirm the presence of environmental contamination on the Subject Property.  If no contaminants are identified, the Phase II ESA should satisfy the “all appropriate inquiry” requirement of an “innocent landowner” defense to liability for sites where RECs were identified during the Phase I ESA. 

 

If contaminants are identified on the Subject Property, your environmental consultant would compare the concentrations of the identified contaminants to Generic Cleanup Criteria or Maximum Contaminant Levels (MCLs).  Generic Cleanup Criteria and/or MCLs are generally established by State and Federal governmental agencies based on physical, chemical, and toxicity data for each contaminant.  In Michigan, if contaminants are identified on the Subject Property at concentrations exceeding the applicable Part 201 Generic Residential Cleanup Criteria, the Subject Property may meet the requirements of being a “Facility” as defined by Part 201.

 

Q:  What if the property I want to buy or lease is contaminated?

A:  In Michigan, Part 201 provides for performing a Baseline Environmental Assessment (BEA) to exempt purchasers of Facilities from the liability associated with the known contamination.  The purpose of the BEA is to distinguish previous contamination from future releases that may occur after the transfer of ownership or occupancy of the Subject Property.  The MDEQ has designated three categories of BEAs (Category N, Category D and Category S), based on the type of contamination on the Property and the potential use of the site.   A Category N BEA would be appropriate if no future significant hazardous substance use or storage is intended for the Property.  A Category D BEA would be appropriate if chemicals planned to be used on the Subject Property differ from those known to be site contaminants. A Category S BEA would be appropriate if chemicals planned to be used on the Subject Property are the same as those known to be contaminants on the Subject Property.  Part 201 states the BEA must be substantially completed on the Property before or within 45 days of ownership or occupancy of the Property by the entity performing the BEA.  Therefore, timing is essential to the environmental assessment process in Michigan.  Because, generally, the BEA can be performed only after a Phase I ESA and/or Phase II ESA is performed, ample time should be budgeted to allow your environmental consultant to adequately address your needs.

 

In addition to providing for liability protection in the form of a BEA, Part 201 generally requires owners of Facilities to meet their “Due Care Obligations” as outlined in the act.  Due care obligations include undertaking measures to prevent exacerbation of existing contamination, undertaking response activities necessary to mitigate unacceptable hazards in order to protect public health and safety, and taking precautions against reasonably foreseeable acts or omissions of a third party and the consequences that could result from those acts or omissions.  Your environmental consultant should be able to prepare a “Due Care Plan” or “Section 7a Compliance Analysis” to outline and address your potential due care obligations  in conjunction with a BEA.  A Due Care Plan should outline the Subject Property contaminants, the relevant exposure pathways for each contaminant, and the actions the new owner will take to mitigate each relevant pathway and prevent exacerbation of the identified contamination.

 

Q:  My Lender is not requiring the performance of a Phase I ESA, so why should I do one?

A:  Generally, banks have certain environmental requirements for a given deal based on their level of risk.  For smaller deals your bank may only require an environmental checklist be completed by your loan officer.  For larger loans your bank may require a Phase I ESA, because their risk may be larger.  In any event, your bank’s risks are much different than yours.  You, as a purchaser or lessee, may be liable for contamination on a Property regardless of the size of your loan, or the value of your assets.  Additionally, the value of the Property you are investing in may be affected by its environmental condition.  The Property you thought was only costing you the purchase price could end up costing you much more in the long run.  Even if you only lease the property, your exposure to liability could come back to haunt you.  The cost of a Phase I ESA is usually minimal when compared to the overall cost of a real estate transaction, and could potentially save you much more money than the deal is worth.  It makes good business sense to know exactly what you are getting into, before you get into it.

 

Consider this, In Michigan, if you buy a site that is contaminated and haven’t done an environmental assessment, the State of Michigan may hold you liable for the contamination.  You may be thinking “how will anyone ever know?”  The answer is simple.  If you decide to  later sell the Property  the new purchaser will likely do a Phase I ESA, a Phase II ESA, and ultimately a BEA.  When the new purchaser sends the BEA to the State of Michigan, they are identifying your site as one of known environmental contamination.  Although the new buyer may not intend to report you, the State of Michigan could review the BEA and pursue you (as a previous owner who acquired the site after 1995) for cleanup of the contamination, even though you may not have caused it.  For this reason alone, It is generally in your best interest to do a Phase I ESA prior to buying or leasing commercial, industrial, and even agricultural Property.

 

Q:  When is a good time to get a Phase I ESA started?

A:  Generally speaking, the sooner the better.  The more time you allow for the environmental issues to be addressed, the smoother things will go at the time of your closing.  A good rule of thumb is to start the process as soon as you have a purchase agreement or 6 weeks before you close, whichever is earlier.  However, your environmental consultant should be able to find a way to expedite your assessment to meet your needs if you have started the process a little late. 

 

I hope the few answers I have posted here are helpful.  The environmental issues related to buying commercial or industrial property can become very complex, and there is no substitute for an in- depth discussion with your environmental consultant.  If you have additional questions, or questions relating to a specific site, please don’t hesitate to call me. 

 

-Tom Stolz

©Stolz Environmental Solutions, LLC 2008

Stolz Environmental Solutions, LLC

1591 West Centre Avenue, Suite 207

Kalamazoo, Michigan 49024

Phone: 269.321.5020

Fax: 866.856.8921

 

email: tom@stolzenvironmental.com