Different Levels of Environmental Site Assessment and the Benefits to M&A Due Diligence


Executive Summary - Phase I Environmental Site Assessments (ESAs) are often used as a means to consider environmental liability prior to acquisition of real property. The main purpose, and in many cases the ONLY purpose for a “simple” Phase I, is to qualify the purchaser for the innocent landowner defense provisions of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) of 1980. To provide a common standard for a thorough Phase I, the U.S. EPA has endorsed the guidance developed by the American Society for Testing and Materials (ASTM) and its E1527-2013 standard, which has largely become the industry benchmark for ESAs while satisfying EPA’s “Standards and Practices for All Appropriate Inquiries”, or AAI requirements. The current ASTM standard has introduced some additional elements that a user can take advantage of when considering the environmental and historical conditions on or adjacent to a property.

Where the simple Phase I ESA is sufficient for certain mergers & acquisitions, the environmental professional you engage should be able to offer more in-depth research when considering complex assets. Additional considerations relate to how certain properties with hazardous materials or releases must be handled after transfer, where requirements vary widely by state. A prudent approach for ESAs on intermediate sites – such as light industrial, manufacturing and commercial facilities where past or present operations are suspected of causing some environmental impacts – is to consider that a potentially contaminated property could fall into a lengthy regulatory process and require cleanup or subsequent use and deed restrictions. Complex operating facilities may still need more in-depth investigation, such as environmental health and safety audits or thorough reviews of existing environmental permits. More important for complex facilities than in cases of simple or intermediate sites, the Phase I ESA establishes a baseline prior to ownership. For properties with recognized environmental conditions, this allows a clear delineation of responsibility whereby conditions can be attributed to the prior owner/operators and not attached to the new owners or management team. After the Phase I, it may still be necessary to perform a Phase II ESA, perhaps to quantify baseline condition before transfer or as required by regulators or insurance underwriters. A typical Phase II is likely to include sampling and analysis of environmental media and regulatory response & remedial action. However, a few small steps beyond the typical Phase I can reduce the need for intrusive investigations and still limit the new owner’s liability.


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