Purchasing property or investing in a commercial real estate project requires significant funds. With limited budgets, many people try to economize by omitting (what they consider) unnecessary or less consequential steps. Phase 1 Environmental Assessment is one of the project phases some investors underestimate and, thus, tend to leave out, hoping to save time and money. While skipping this step may bring short-term monetary benefits, missing it out proves to be a costly mistake eventually.
This article will explain the importance of Phase 1 Environmental Site Assessment (ESA), highlight its benefits for your business and the environment, and underscore the long-term costs of ignoring this crucial environmental due diligence phase. Do not be penny-wise and pound-foolish – read on to learn why Phase 1 ESA is vital for meaningful real estate investments.
Leaving out Phase 1 ESA may look appealing at first sight, but it may lead to prohibitive costs and complications further down the road. The most consequential outcomes of missing this vital due diligence tool include the following:
Phase I ESA consists of comprehensive site assessments that cover the property’s current and past use. Only trained environmental professionals can conduct thorough site inspections uncovering hazardous materials (such as petroleum, lead, or other chemicals) that endanger the environment and human health. Skipping this essential step increases the chances of grave health and environmental consequences. Investors who deal with these issues post-factum (after purchasing the contaminated site) must face the clean-up costs liability, which can amount to astronomical sums. So, property owners or prospective buyers who cut on Phase 1 ESA costs ($2,000-$3,000 on average) end up paying hundreds of thousands to clean up the contaminated ground.
Acquiring a contaminated property is not only a health or environmental risk. It can expose owners to far-reaching legal and financial consequences. Individuals and businesses (such as employees, tenants, and property owners occupying adjacent properties) feel the effects of developing a contaminated site. They can file lawsuits requiring financial redress for the damages they suffered. In the case of numerous neighboring properties, multiple parties can file class lawsuits claiming multi-million damages and legal fees. Being involved in such lawsuits can tarnish developers’ reputations and result in lost business opportunities, which is a costly price for skipping Phase I ESA.
Commercial projects involving real estate can amount to millions of dollars. Most developers rely on banks and other financial institutions to lend money for such an investment. Once the funds are secured, developers seek to insure their venture against potential risks. In both cases, lenders and insurers require Phase I ESA before lending the funds or providing insurance. In essence, they want to know the risks associated with the property, which helps them assess the profitability of giving the loan or insuring the investment. Developers who bypass the Phase I ESA face the prospect of loan or insurance denial. That jeopardizes the entire project due to lack of funds – a hefty price for ignoring the environmental due diligence.
Trying to cut costs, many property owners and developers skip Phase I ESA and jump right to Phase II ESA without knowing whether they need it. Phase II ESA takes the results of Phase I ESA and raises the site inspection to a higher level. Environmental experts take soil and groundwater samples, analyze them, monitor them, and test the results. The entire process takes longer and costs significantly more than Phase I ESA. However, a thorough Phase I assessment can show that Phase II is unnecessary due to a lack of evidence about potential contamination. Likewise, without prior due diligence (Phase I), the next stage can give only partial results. In Phase I, environmental consultants engage in detailed site examination – combing databases, visiting sites, and interviewing past and current owners. As a result, Phase I offers a roadmap, showing which parts of the property require sampling, testing, monitoring, and remediation. Without such an assessment, Phase II can focus only on some parts of the land while ignoring the rest of the property. Finally, omitting Phase I can lead to too expensive Phase II. Depending on the results of Phase I investigations, the property in question may need sampling, analysis, and testing, whose complexity and price varies. Missing this step can result in complicated (and expensive) and redundant tests. Hence, saving on Phase I assessment can result in an unnecessary, incomplete, and costly Phase II ESA.
As shown above, skipping Phase I Environmental Assessment can prove costly overall due to increased environmental and health risks, legal and financial repercussions, insurance, and lending hurdles, and expensive or incomplete Phase II Assessments. However, choosing a cheap Phase I assessment can be equally harmful.
Here is what cheap Phase I ESA means. If, in your pursuit of lower costs, you choose environmental consultants without adequate credentials (ASTM and CERCLA qualifications, successful record, etc.), you will put more money down the drain than you think. The same applies to entrusting your investment to environmental consultants who do not follow relevant standards (despite having the necessary qualifications). These so-called experts are typically the lowest bidders for the job. Choosing them is always the wrong decision.
In terms of liability protections, a poorly done Phase I ESA is the same as not having one done. You will be on the hook financially for any damages and clean up costs.
Think of Phase I Assessment as an investment you make before purchasing commercial property. By investing in qualified professionals who do the work meticulously and diligently, your real estate investment makes more sense. Conversely, by cutting corners on environmental due diligence, you put the whole project at a disproportionate risk and, therefore, strip it of its meaning and purpose.
In conclusion, if you think of avoiding extra costs by skipping Phase I ESA or choosing the cheapest solutions, think twice because it will cost you in the long term.
Here at Hanis Consulting, we do not compromise on quality. Our experts are well known for their thoroughness and attention to detail.
We are an Illinois-based environmental consulting company specializing in environmental due diligence, site investigation (including hydrogeological investigation), soil and groundwater remediation, litigation support, and fractional management.
Performing Phase I Environmental Site Assessment, we do not leave a stone unturned. Our team will take special care to determine if potential contamination is at your site, protecting you from environmental and health hazards and shielding you from financial liability.
Illinois environmental due diligence industry offers many consultants to help you with Phase I ESA. There are cheap, average, and quality solutions. And there is Hanis Consulting.