Environmental Due Diligence – Part III
If the Phase I ESA discussed in the previous segment of this blog identified potential Recognized Environmental Conditions (RECs), the next step in the process is a Phase II Environmental Site Assessment (ESA). A Phase II involves performing one or more explorations to collect soil, groundwater, vapor and/or other types of samples. The environmental professional uses this data and expertise to render an opinion concerning the magnitude and likely extent of contamination that make it a REC.
An identified REC does not mean that a Phase II must be performed, and there are usually no legal requirements to do a Phase II exploration. There is no “one-size-fits-all” Phase II ESA. The level of exploration is determined by the estimated severity of the contamination, specific questions the purchaser wants answers to, and the budget available to complete the work. In addition, the level of exploration needs to satisfy the purchaser’s risk tolerance (level of acceptable risk) and, in most cases, the risk tolerance of the lender. In the end, the purchaser and seller need to know if the site requires remediation, how much it will cost, and timeframe to complete the remediation.
One of the purposes of a Phase II is to reduce the level of uncertainty, but it cannot eliminate it. No matter how much sampling is done, there will always be some level of uncertainty regarding subsurface environmental conditions. The goal of the environmental professional is to collect sufficient information to help him/her characterize the contamination. The conclusions of the Phase II ESA help the seller and purchaser make informed business decisions regarding the property.
Often times the purchaser requires that the seller perform the remediation prior to closing. Another approach is to reduce the purchase price by the estimated cost of remediation. This is a riskier option since there may be more contamination than anticipated resulting in unanticipated costs for the purchaser. In addition, the timeframe for approval and performance of a remediation program may affect when development may occur.