Phase I vs. Phase II Environmental Site Assessments: What’s the Difference and When Do You Need Each?

Conducting a Phase I Environmental Site Assessment (ESA) is an essential part of environmental due diligence when considering a potential commercial real estate acquisition. In some cases, a Phase II ESA will be necessary as well. What’s the difference? Learn more from an experienced California environmental attorney at Bick Law LLP:

Phase I Environmental Site Assessments (Phase I ESAs)

What is a Phase I ESA?

Conducting a Phase I ESA is part of the process of meeting the All Appropriate Inquiries (AAI) requirements for mitigating cleanup liability risk exposure under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). A Phase I ESA should be conducted in compliance with ASTM Standard E1527-21, and should broadly involve:

• Interviews with current and prior owners and occupants;
• A review of relevant records; and,
• A visual inspection of the subject property.

Each of these steps can be more or less complicated depending on the specific circumstances at hand and the specific environmental risks the subject property presents. Ultimately, a Phase I ESA should provide insight into potential contamination concerns—with the understanding that further investigation may be necessary.

When is a Phase I ESA Required?

A Phase I ESA is required to meet the requirements for avoiding potential cleanup liability under CERCLA. Under CERCLA, current owners of commercial real estate can be held liable for cleaning up environmental contamination even if they are not the source of the contamination themselves. As a result, it will typically make sense to conduct a Phase I ESA early in the due diligence process—as this will allow for informed decision-making if there are contamination concerns (or potential contamination concerns) that need to be addressed.

What Are the Potential Outcomes of a Phase I ESA?

Broadly, a Phase I ESA has two potential outcomes. It can either: (i) identify one or more recognized environmental conditions (RECs) that need to be addressed; or (ii) fail to identify any RECs. Due to the nature of a Phase I ESA, however, failure to identify any RECs during the process does not necessarily mean that no RECs exist on the subject property. With this in mind, if a Phase I ESA comes back “clean,” a prospective buyer will still want to work closely with experienced environmental counsel to ensure that it is taking adequate steps to mitigate its risk should it decide to move forward with acquiring the property.

What Are the Benefits of Conducting a Phase I ESA?

The benefits of conducting a Phase I ESA are twofold: (i) it allows for informed decision-making during the due diligence process; and (ii) it provides a defense against potential cleanup liability under CERCLA. With that said, conducting a Phase I ESA is not the only step involved in conducting environmental due diligence on a piece of commercial real estate targeted for acquisition—far from it. To make fully informed decisions, prospective buyers will need to work closely with an experienced California environmental attorney who can help them adequately assess all potential environmental risks involved.

Phase II Environmental Site Assessments (Phase II ESAs)

What is a Phase II ESA?

Unlike a Phase I ESA, a Phase II ESA uses intrusive and quantitative methods to examine potential environmental contamination. A Phase II ESA may involve steps including:

• Environmental sampling and testing;
• Lab analysis and comparison of lab results against applicable environmental standards; and,
• Interior investigations, ecological assessments, and other means of identifying contamination.

Depending on the specific steps that need to be taken, it may be necessary to engage various non-lawyer experts and specialists to confirm the existence or non-existence of environmental contaminants on the subject property. While Phase I ESAs tend to follow a fairly standardized set of procedures, the steps involved in a Phase II ESA will generally be tailored to the specific concern (or concerns) at hand.

When is a Phase II ESA Required?

A Phase II ESA is required when a prospective purchaser needs to learn more about the subject property based on the discovery (or potential discovery) of one or more RECs during a Phase I ESA. If a Phase I ESA identifies one or more RECs, it will be necessary to address them before moving forward in order to mitigate the risk of facing cleanup liability under CERCLA.

What Are the Potential Outcomes of a Phase II ESA?

A Phase II ESA should confirm either the existence or non-existence of the environmental contaminants examined during the assessment. If a Phase II ESA confirms the non-existence of contaminants, this can provide protection from cleanup liability under CERCLA (assuming the prospective purchaser also takes all of the additional steps that are necessary to secure this protection). If a Phase II ESA confirms that the subject property is contaminated, then the prospective purchaser will need to work with its environmental counsel to determine what next steps are appropriate under the circumstances at hand.

What Are the Benefits of Conducting a Phase II ESA?

The benefits of conducting a Phase II ESA are largely the same as the benefits of conducting a Phase I ESA: informed decision-making and environmental risk management. Here, too, however, the outcome of a Phase II ESA won’t necessarily be sufficient for informed decision-making on its own. Prospective purchasers may need to work with their environmental counsel to assess various other potential risks as well. This includes not only risks for governmental enforcement actions at the federal and state levels, but also risks for private civil litigation.

Schedule a Confidential Call with a California Environmental Attorney at Bick Law LLP

If you would like to learn more about conducting a Phase I or Phase II ESA in connection with a proposed commercial real estate acquisition, we encourage you to contact Bick Law LLP. We have extensive experience in this area and can help you make informed decisions about your next steps. To speak with one of our experienced California environmental attorneys in confidence, give us a call at 949-432-3500 today.