When buying commercial property due diligence is always recommended, and a Phase 1 Environmental Site Assessment (ESA) is the first step in this process. In today's world where every property is subject to potential environmental risk, an ESA can help to determine whether a property has been contaminated by previous or current activities. It is like cheap insurance that allows a buyer to purchase an asset knowing that there are no environmental liabilities associated with it. It protects the buyer and limits his or her liability by discovering environmental concerns prior to the purchase of the property.
Creditors also often require an ESA, as this helps them determine if there are any environmental risks that could affect the value of the property or the borrower's finances.
There are three main components to Phase 1 ESA.
1. Site inspection is a thorough visual assessment of the property. It includes a comprehensive ocular inspection of the interior of any structures within the property, the exterior areas surrounding these structures and the property lines. It also includes observing and inspecting nearby or adjacent properties.
The site inspection aims to discover and identify any evidence of previous activities that may have contributed to any incidence of soil or water contamination. The presence of gasoline stations, dry cleaning operations, industrial facilities, residential heating oil tanks and illegal garbage dumping within or around the property in question may be indicators of impending environmental issues.
2. Reviewing the regulatory records of the property brings its history to light, and may reveal any past instances of hazardous substances at or near the property, which may have contaminated the site. A property, for example, may be the present location of a business without any environmental concerns, but perhaps years ago it may have been the site of an auto repair shop that may have allowed oil and other waste substances to leech out into the surrounding soil and water sources.
3. Interviews with former owners, tenants and workers may also be conducted. Having spent much of their time on the property, the first-hand experience of these people may prove valuable to any assessment, as they may also offer useful insights on the previous use and the current state of the property. However, caution must be observed in dealing with interview information. The time away from the property may have clouded any clear memory of the relevant details, and because the interviewees may not have current access to records, the accuracy of the information they offer may be in question. Assessors need to make sure to weigh the information these people offer, and to always accompany their statements with relevant documentation.
A Phase 1 ESA focuses on the possible presence of hazardous substances and petroleum contamination, and may not include the evaluation of other issues such as the presence of asbestos or lead, water intrusion and mold issues and radon gas. The consultants may, however, alert the buyer of the possible presence of these issues and recommend further testing.If a site is contaminated, its market value will most likely fall. The prospective buyer may discover that cleaning up the property may cost even more than the property's value. Creditors are also concerned; borrowers whose property is later discovered to be contaminated may be prosecuted and be forced to pay fines or spend to clean up the property. Any of these situations may affect the borrower's ability to pay the loan.