So you are a commercial developer in the process of acquiring a property in an urban environment. As a savvy real estate professional, you have retained an environmental engineering firm to conduct a Phase I review of your target property. That review comes back with “no recognized environmental conditions.” So the property’s clean right?
Not so fast.
The Phase I environmental site assessment is a critical tool in the developer’s arsenal to evaluate environmental risks. As I have discussed previously, it is the initial cornerstone of the environmental liability shield every developer should be looking to build. It is important, however, to understand the limitations of a Phase I, so as to understand the risks that a Phase I won’t reveal.
The primary limitation is simply that the comprehensiveness of a Phase I is dependent on the available data and ability of the engineers to access the property. One common environmental problem that highlights this issue is the presence of undocumented underground storage tanks. Environmental engineers preparing a Phase I will examine public records, and conduct a walkthrough of the property looking for evidence of USTs, but if the tank is undocumented, and there are no visible fill ports, the presence of the UST may go undiscovered until post-acquisition development is underway. And in urban environments, where subsurface contamination is more likely and less accessible, developers who are planning on demolishing existing structures should be prepared to address any environmental issues that are uncovered as a result.
Another problem that can crop up is where there is not continuous documentation of the prior uses of a property. Under the ASTM standards which govern Phase I reports, such “data gaps” should be disclosed in the Phase I, and they can hide many sins. This is not uncommon when dealing with derelict or semi-derelict properties. The prior owners who built and/or operated the existing structures may be long gone. This should be considered a risk factor in any evaluation of the property.
The other common problems that a Phase I may not reveal, are the presence of lead paint and asbestos containing materials (ACM). These materials were commonly used in commercial and residential construction until the 1970’s, and there is still a significant inventory of properties out there that contain them. Depending on how much material is present, addressing the lead paint and/or ACM can be an expensive proposition. Your environmental engineers may warn you of any suspected lead paint or ACM that they see, but a Phase I does not normally include a true lead paint or asbestos survey. Nor is it truly designed to find lead paint or ACM. A developer who is considering purchasing a building that was constructed prior to 1980 should consider having it surveyed for lead paint and ACM prior to completing the acquisition.
Understanding what a Phase I is, and what it isn’t, is critical to effectively managing environmental liability in commercial real estate transactions.
Alex P. Basilevsky focuses his practice on complex litigation and environmental law. He regularly writes and speaks about environmental issues in urban commercial property transactions. He can be reached at 215-665-3094 or firstname.lastname@example.org