Many involved in the real estate process view environmental due diligence simply as a checklist item. Title review? Check. Appraisal? Check. Phase I Environmental Site Assessment? Check. Antacid and ibuprofen? Check.
Or worse yet, environmental due diligence is sometimes viewed as a drain that swallows precious transaction funds. There it goes – a couple of grand swirling down the pipe, never to be seen again. Or, gasp, dare I say it – some industry professionals view environmental due diligence as a dirty, rotten deal breaker. As in: “here comes the pesky environmental consultant, walking with that perpetual black cloud over his head. I wonder what he’s going to find this time…”
Who needs environmental due diligence anyway? Ignorance is bliss. Or is it?
Much has been written on the importance of a proper Phase I Environmental Site Assessment (ESA). And it’s all true. Simply put, environmental messes can be extremely expensive to clean up. Better to spend a little time and money up front to greatly lessen the risk of buying that innocent-looking warehouse sitting on a plume of ethyl-methyl death released by a long-ago (and bankrupt) tenant.
But the Phase I ESA, as its name implies, is potentially only the first stage of the environmental process. It’s the identification of Recognized Environmental Conditions (REC) during the Phase I ESA that leads to the Phase II and the need for continued environmental due diligence. RECs indicate that not all the questions could be answered through the Phase I ESA process – something is amiss. More work is necessary. Viewed in a different manner, during the Phase II ESA the antacid is in greater demand, the ibuprofen is extra strength, and the invoices can contain extra zeros.
The Path To a Phase II ESA Goes Something Like This…
You get your Phase I ESA report in hand, don the reading glasses, sit in your favorite reading chair, and anxiously read every last word of the report like it’s the latest page-turner from Dan Brown. Well ok, maybe you just skip to the Executive Summary and scan the page for the dreaded REC. Either way, you find them – rats! RECs are identified and you curse your fortunes and worry about a deal going south. At 10:30 p.m. you email your environmental consultant, your project attorney, and let your bartender know that you’ll be right over. The next day you anxiously await the Phase II ESA proposal so you can complete some back of the envelope calculations and begin damage control.
So what does this Phase II ESA work involve? What is the proper scope? Or better yet, how much is going to cost? To answer these questions allow me to personalize the Phase II ESA process, possibly in a way you’ve never viewed it before – as a medical analogy:
Just Like a Medical Check-up
When chatting with non-environmental professionals, I’ll often liken the Phase I ESA to an initial checkup. You walk into a doctor’s office and sit on a sheet of crinkly white paper pulled over a drab brown pleather examining table. After tapping your knees, asking about family history, verifying your age, and looking around a bit with a flashlight, the doctor concludes you are at risk for heart disease and diabetes.
At this point, you essentially have two choices. You could walk out of the office, head out for lunch, and order a plate of cheese fries and a sweet tea. Or, you could go for the medical equivalent of an environmental Phase II – further testing.
But here’s where the scope is important. What if the doctor only orders a blood test for cholesterol but skips the blood sugar analysis? Maybe he passes on the stress test. Obviously, you shouldn’t expect a clean bill of health upon receipt of the test results. You’ll get a comfort level on some potentialities, but others will linger like a summer cold in August.
A Hypothetical Case Study
Let’s take a look at a hypothetical environmental scenario by following the imaginary pesticide compound I introduced earlier – ethyl-methyl death (EMD). The Phase I ESA identifies a former EMD manufacturer from the 1950s named Consolidated Pesticides and Baby Formula (if there are two things all those Baby Boomer tykes needed, it was shiny worm-free apples and formula). Later, when EMD was found to cause blindness in bats, Consolidated switched to the slightly less toxic necro-chloride (NC).
Later still, thanks to the musings of Rachel Carson and Richard Nixon’s adoption of the Unites States Environmental Protection Agency (USEPA), both EMD and NC were banned from production. Its bread and butter pesticides now outlawed, and the market for formula drying up (thank you very much, Dr. Spock), Consolidated sells the building to a group of grandmothers that open a knitting factory.
During the Phase I walkthrough there are no signs of trouble – just a stable of elderly ladies sitting in neat rows of rocking chairs knitting away. Piles of Christmas sweaters await distribution to aunts and uncles across the country. In the corner, a couple of kittens swat at a ball of yellow yarn. The whole operation just screams “aw, shucks!”
But astutely, the consultant uncovers the building’s nefarious past. She flags the former use, including the abandoned EMD and NC storage tanks. She notes the floor drain (which unbeknownst to all empties to a long forgotten dry well in the back). Now connected to natural gas heat, she discovers evidence that the boilers were formerly fired with heating oil from an underground storage tank. From historical aerial photograph review, she finds the former industrial waste lagoon was at some point converted into an employee recreational swimming hole.
So, considering a lack of historical information for these concerns, a proper Phase II ESA will require sampling data from a number of areas. Obviously, the area around the lagoon/swim hole and the pesticide and heating oil tanks should be sampled. The drain should be traced to its terminus and sampling should be completed as necessary (in this case, from the contents of the dry well and the soil surrounding). We’ll need to be careful in choosing sometimes expensive lab analyses as we need data for EMD and NC and petroleum compounds. But there may be other areas – what about the shipping/receiving area where the railcars arrived? What about those storm water ditches? Care should be taken in writing a thorough and defensible Phase II ESA story.
Targeted, Thorough & Defensible
As it is impossible to completely eliminate risk, environmental due diligence is a matter of risk reduction. Certainly, you could poke holes all over the place and make geological Swiss cheese sampling for every compound under the sun. That wouldn’t help the cause either. Instead, targeted, thorough, and defensible Phase II ESA workplans are key.
The post-Phase I process can be a bit confusing for those that don’t make their living by peering into the ground and analyzing laboratory data for unpronounceable compounds. So, when confronted with the need for Phase II environmental due diligence, personalize the process and think in terms of the universal language of medicine and individual health. Because like a comprehensive medical physical, the scope of a Phase II ESA matters.