X Reading a Phase I Report
Library | Illinois Environmental Law for Non-Environmental Lawyers (2017 Ed.) |
A. Introduction
In any real estate of business transaction which includes real estate, the Buyer will want to obtain a Phase I Environmental Assessment. Even for some residential properties, Lenders and Buyers insist on a Phase I Assessment to evaluate the risk from non-residential activities previously conducted at many urban sites in neighborhoods going under a transition to residential use.
A Phase I Environmental Assessment is a limited review of the property by qualified environmental professional. See generally 415 ILCS 5/22.2(j)(6)(E) (iii). In conducting a Phase I Assessment, the environmental professional reviews available information about a property for purpose of preparing a report to assess whether there are any environmental conditions that might affect the value or future use of the property or lead to potential environmental liabilities. A Phase I report is distinguished from a Phase II assessment which would involve invasive soil, vapor and/or groundwater testing. While the preparation of Phase I reports has become commonplace, there are many critical issues for the other professionals involved in reviewing Phase I reports for the transaction. Many times, the reports are reviewed initially by either the Buyer's real estate counsel or the Lender's mortgage counsel who may have some limited environmental expertise but probably limited specialized training in the field. While no guidebook could replace the value from having reviewed hundreds of similar reports for other sites like an experienced environmental lawyer, this article will attempt to highlight some of the issues faced by less experienced reviewers when confronted with a Phase I report.
B. Issues to Consider
The American Society for Testing Materials (ASTM) developed an industry standard for conducting Phase I assessments, ASTM 1527-13. Under the ASTM standard, the Phase I should include a preliminary analysis with a history of the site and the surrounding areas. As described in the ASTM standard, a Phase I assessment is only valid for 180 days after completion of the site visit. There also is an Illinois standard for the appropriate Phase I Environmental Site Assessment process. See generally 415 ILCS 5/22.2(j)(6)(E)(v).
Under Illinois and Federal Law, a purchaser of property does not become liable for preexisting conditions merely by acquiring the property assuming that the purchaser can show that it conducted "all appropriate inquiries" in its due diligence. If the purchaser meets the "all appropriate inquiries" standard, it may qualify as a bona fide prospective purchaser limiting the purchaser's liability for pre-acquisition conditions. See Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") 42 USC § 9601(40). USEPA has codified the "all appropriate inquiry" requirement in its regulations promulgated at 40 CFR Part 312. USEPA expressly adopted the ASTM 1527-13 standard effective December 31, 2013. See 40 CFR Part 312.11.
As the process of obtaining Phase I reports has become more standardized, virtually every Phase I Report will be done to the ASTM standard. The Illinois standard does not completely match the ASTM standard but is very similar. While not exhaustive, the following contains a list of issues to consider when reviewing a Phase I Environmental Site Assessment Report.
1. Be Skeptical
As a general rule you should be skeptical about the findings in any Phase I environmental report. Even a report prepared by your client's own consultant should be suspect for at least two reasons. First, while the cost of the assessment varies from company to company, usually the consultant charges only a few thousand dollars for the finished report. In general, most of the companies conducting Phase I assessments do so at a loss or on a break even basis. Thus, the Phase I assessment frequently is performed by the least experienced member of the staff. The reader of a Phase I report should assess it critically because the inexperience of the preparer may mean that the report is incomplete or does not address material questions with regard to environmental conditions at the site.
Second, consultants preparing a Phase I report frequently operate without adequate information to do a thorough job. A report is theoretically prepared to explore and develop information about the environmental risks at the site. Often the level of inquiry depends upon the desires of the prospective purchaser and the type of property. The Buyer will get a better report if the environmental professional knows as much as possible about the intended use of the property and the reasons for the Phase I report. Under the applicable ASTM standard, the environmental professional must provide the owner of the site with a questionnaire to develop a history of the property and its uses. The environmental professional also must provide the user of the report with a simple short questionnaire designed to obtain from the user of the report about any preexisting available environmental information about the site. The user of the report should think carefully about its answers to the questionnaire because providing more complete information can only improve the quality of the Phase I report. If the...
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