When purchasing a commercial piece of property, performing environmental due diligence can seem like a waste of time and money and feel like a real pain in the you-know-what, especially when your Phase I Environmental Site Assessment (ESA) identifies recognized environmental conditions (RECs) that lead to recommendations for a Phase II ESA. For those who aren’t afraid to stay in the game, despite the identified RECs, this is where the cost of the due diligence begins to increase and the closing date can seem to fade off into the sunset. However, this is also that critical moment where the purchaser can reduce their future environmental liability and maybe even find opportunities to negotiate a reduced purchase price.
Benefits of a Phase II ESA:
Legal Liability Protection: IN 2002, Congress passed the “Small Business Liability Relief and Brownfields Revitalization Act” (Brownfield Amendments) that created a new landowner liability protection from the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund). The All Appropriate Inquiry Rule in the Brownfield Amendments provides an escape from liability called the “innocent landowner defense” and allows a purchaser to qualify as a “Bona Fide Prospective Purchaser (BFPP).” This means a person may now acquire property knowing, or having reason to know, of contamination if they meet the threshold criteria and ongoing obligations. The criteria and obligations to receive liability protection under CERCLA as a BFPP can be found at www.epa.gov/enforcement/bona-fide-prospective-purchasers.
Performing an appropriate Phase I ESA prior to purchasing the property is the first step in qualifying for the BFPP defense, but not the only step. One of the obligations that a BFPP must also do to gain future liability protection is meet continuing obligations during their property ownership. One of the required continuing obligations is to perform what is called “reasonable steps” with respect to hazardous substances affecting a landowner’s property. Reasonable steps include the following:
- Stop continuing releases;
- Prevent threatened future releases; and
- Prevent or limit human, environmental, or natural resource exposure to the hazardous substance release.
The sampling results, and possibly geophysical survey information, obtained from performing a Phase II ESA is the information needed to determine what a purchaser’s “reasonable steps” will look like. For instance, one would not know how to prevent exposure to contamination if the type, location, and concentrations of contamination are not determined. Do you need to install a vapor mitigation system inside the building or perform an excavation to remove contaminated soils from the surface? You won’t know unless you perform the Phase II ESA! Similarly, future releases cannot be prevented if you do not know what the threat even is. The more you know!
Establish a Baseline – The Phase II ESA will indicate what, if any, contamination is present prior to purchasing the property. This can provide a defense against regulatory and third-party claims during ownership and after selling.
Determine After Purchase Expenses – Besides gaining legal liability protection as a BFPP, the main purpose of performing environmental due diligence is to ensure that the scope of redevelopment project risk is fully understood by both you and the lender. The results of the Phase II ESA will allow you to determine the cost of any necessary cleanup efforts that are required to achieve your redevelopment goals, as well as any associated on-going costs.
SESCO Group will help you the entire way! Our team of experts will partner with you to assess and mitigate against any redevelopment project risk that you may be facing.
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Please contact Tonia Pippin with any questions at 317.347.9590 ext. 26 or tpippin@sescogroup.com.