The Phase I

I like to look at the Phase I as kind of a history report for the property and a snap shot in time.  What is the property used for and more importantly what has it been used for in the past.  Phase I reports are typically, and should be, conducted in accordance or in conformance with the American Society for Testing and Materials (ASTM) standard E1527-13.  Be advised that as of December 31, 2013, E1527-13, replaced version ASTM E1527-05, which had been the industry standard for last seven years. 

On December 30, 2013, the US Environmental Protection Agency (EPA) published a Final Rule adopting ASTM E1527-13 as the standard satisfying the “all appropriate inquiries” (AAI) requirement for landowner liability defenses under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and intends to amend the AAI Rule by removing references to the E1527-05 standard. In short, Phase I reports should now be completed in accordance with the E1527-13 standard. So if your proposal says E1527-05 or just E1527, and you require an ASTM compliant Phase I, send it back to your selected consultant for revision.  And be careful of the consultant that uses the terminology “in general accordance with” in their proposals, that should be a signal that the consultant may take some shortcuts in performing the work.

According to ASTM, the purpose of the Phase I is to define good commercial and customary practice by which a person seeks to determine if a particular parcel of real property (including improvements) is subject to recognized environmental conditions.  In other words, is there a presence or likely presence of any hazardous substances or petroleum products in, on, or at the property either due to a release to the environment, under conditions indicative of a release to the environment, or pose a threat of a future release to the environment.  To summarize, a Phase I when complete should answer the following question: what is or was on the property that may have or could have the potential to impact the environment.

Preparation of the Report

The report for a Phase I should follow the recommended format that is provided in E1527-13.  A typical report will incorporate the following sections:

·         Summary – think of this as an executive summary
·         Introduction – identifies the property and the purpose of the Phase I
·         User Provided Information – this is the material that you provide to the consultant
·         Records Review – the review of available records by the consultant (which can be an issue if you use a consultant not        

      located either in the state or in proximity to the state the property is in)
·         Site Reconnaissance – what the consultant saw at the property (see above)
·         Interviews – who did the consultant speak with and what did they tell the consultant
·         Evaluation – provides the consultants findings, opinions and conclusions
·         Non-scope services – additional services that may have been conducted, like an asbestos survey
·         Appendices – the supporting documentation

Do you notice one thing that is not included in the preparation of the report?  The consultant’s RECOMMENDATIONS should NEVER be included in a Phase I report, unless specifically requested by the User.  This is extremely important to the User since a consultant may include recommendations in the report as a way to secure follow-on Phase II work, particularly if the work is being conducted for a Lender. The only information that should be provided in the evaluation section of the report is the environmental condition(s) that were identified. Now, the consultant can give an opinion that additional work may be necessary to determine if a release has occurred, but according to E1527-13, this opinion does not constitute a requirement that the consultant include any recommendations for a Phase II or other assessment activates.   All discussions on additional work should be conducted outside of the Phase I report first verbally and then in the form of a proposal or memo if requested by the User.

Things to remember about the Phase I

The Phase I report is THE MOST IMPORTANT DOCUMENT that is generated as part of the due diligence process. Even with the bold lettering I cannot emphasize enough the importance of the Phase I.  This one report is the foundation for all future environmental work that will be conducted on the property.  Just like any construction project, you need a good foundation to build upon.

A few important items to remember and take with you:

·         A good Phase I will typically cost between $3,000 – $5,000 depending on size, use and history of property, and standard

      turnaround time.
·         For most environmental companies, a Phase I is a loss leader. They are usually looking to at best break even on a Phase I.
·         Do not skimp on the Phase I, a savings $500 on a Phase I could cost you $50,000 or more on future investigation/cleanup

      costs for a missed environmental condition or lead to a protracted negotiation of the purchase and sale contract terms.
·         The typical time frame to complete an ASTM compliant Phase I is about 1-2 weeks, so make sure you leave enough time for

       your consultant to complete the Phase I.

·         Again…The Phase I is the most important document that is generated as part of the due diligence process!

A few things to look out for:

·         Make sure that the consultant sends you or your environmental attorney a DRAFT copy of the Phase I first so that there 

      are no surprises.
·         Proposals and reports that use the term “in general accordance with.”
·         A Phase I that identifies no environmental conditions on the site. A develop property will almost always have at least one             environmental condition or at least a “data gap” (a term consultants like to use to describe a potential environmental 

      condition when either they do not have enough information in order to make a determination).

·         Very low cost Phase Is, remember you get what you pay for.
·         The consultant recommending additional work in the report.

Lastly, the following items are typically considered non-scope or out-of-scope items for a Phase I: asbestos containing materials, lead-based paint, mold, and building materials containing PCBs.  Discuss with your consultant on whether you want to add these items as part of the Phase I since their presence will potentially have a cost impact on any future development, renovation, and/or demolition plans you may have for the site.