When considering real property transactions today, nearly all commercial lenders require investigation of the property’s historical uses and associated potential environmental concerns in order to fulfill due diligence requirements. Because property values can be greatly diminished by the presence of environmental problems, the need to ascertain potential liability is crucial to both the buyer and seller. Phase I pre-purchase/pre-sale environmental assessments and Phase II site investigations are designed to answer the following questions: (1) Can the site be purchased or financed without significant liability or risk? (2) Are environmental problems with the property trivial or significant? (3) Does the cost of dealing with these problems outweigh the possible benefits of the acquisition?

Typically, the purchaser or the bank that is financing the purchase will require an appropriate environmental assessment of the property to qualify for the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) innocent land owner defense, and similar defenses under certain state acts. This allows the owner of contaminated property to utilize this statutory defense against potential liability for pollution conditions which may arise as a result of the actions of a third party. Unfortunately, the fact that an environmental assessment has been conducted and a "clean" report issued does not guarantee that the buyer and the bank will escape all responsibility for future cleanup costs should pollution be found. This underscores the importance of a thorough investigation, performed by a qualified individual or organization maintaining the proper professional insurance.

Although there are no federal or state regulations that stipulate proper investigation procedures, several professional organizations have developed standard guidelines for conducting environmental assessments, including the American Society of Engineering Firms Practicing in the Geo-Sciences, the National Groundwater Association, and the American Society for Testing Materials (ASTM). Of these, the ASTM standards (Designation E 1527) have gained widespread acceptance as a minimum requirement for environmental due diligence.

The Phase I Environmental Assessment
The Phase I environmental assessment is a due diligence screening tool designed to highlight environmental liability associated with real property through research and observation. At a minimum, a Phase I performed in accordance with ASTM standards should consist of the following:

• Inspection of the property, including all structures, to identify possible sources of contamination such as asbestos, electrical equipment containing PCBs, and hazardous substances or wastes.
• Inspection of the property for evidence of possible contamination from leaking storage tanks, old disposal areas, chemical containers or drums.
• Investigation of past spills or illegal disposal of hazardous substances, which can be evidenced by observing stained soil or stressed vegetation.
• Interviews of individuals familiar with the property and its history to identify past events and uses that may have created conditions that could lead to environmental compliance problems.
• Search of available federal, state, county, and municipal records to identify possible sources of contamination on or near the site. Often the firm conducting the Phase I will subcontract a company to perform a state and federal environmental database search, given specified distance radii around the subject property.
• Search of title records for previous 50 years to identify past owners and uses of the property.
• Review of available historical aerial photographs of the site to identify its past uses and any evidence of large-scale past waste disposal on the property.

While sources of inquiry are generally relatively standard, the availability of information depends on the degree of inquiry and the persistence of the investigator. For example, an aerial photograph may reveal a building on a property which was demolished to allow for current site development. However, a review of municipal records fails to supply any information regarding the property improvements or even a date of demolition, since many local departments purge their files upon redevelopment of a site. Often the address of the previous building is required to obtain information; however, the address in this case is not known or "readily available." To identify the building, the investigator may need to research the adjacent properties and perform a search for the target building address in between, to begin the due diligence process. Constraints on the "above and beyond" acquisition of information may include the experience level of the investigator, as well as the allotted budget of the project. Typically, a compromise must be struck between the availability of time and resources, and the financial constraints imposed by the party requesting the Phase I.

Changes in state and local regulatory personnel and in departmental policies often make it difficult for the individual conducting the assessment to obtain site information, unless he or she is willing to look beyond the standard sources of information. Phase I environmental assessments are similar to sleuthing; information must be qualified, clues investigated, and leads followed until the investigator and client are satisfied that "all appropriate inquiry" has been made and all readily available information has been reviewed.

The Phase II Site Investigation
If a Phase I assessment reveals contamination on the property, the contracted firm should recommend the performance of a Phase II investigation to identify specific chemical contaminants, as well as vertical and aerial extent. In situations where available records or previous activity on the property suggest a high probability of existing contamination, Phase II activities can be conducted concurrently with the Phase I assessment to save time and expense.

Depending on conditions at the property, a Phase II investigation typically includes surface or subsurface soil sampling, and possibly groundwater sampling. The type or extent of sampling activities is dependent on the contaminant source identified. For example, evidence of a surface release from a historical drum storage area would most likely warrant a surface or near-surface soil investigation, whereas documentation of an unregulated underground storage tank on the property would necessitate a subsurface soil investigation and perhaps groundwater sampling. The chemical constituents chosen for analysis should correspond with the contaminant source; however, more extensive, costly analysis may be required when a variety of chemicals may have been released, such as in the case of a general waste drum storage area.

From a cost standpoint, Phase II field activities are typically more expensive than Phase I. Higher costs are justified primarily by increased planning, equipment, personnel, analytical, and health and safety concerns. However, the client should not pay for a more extensive investigation than what is required. To this end, it is recommended that the client obtain several proposals from environmental firms for a given project, if for no other reason than to see how each approaches a given pollution condition. The client should not feel "locked in" with the Phase I firm making recommendations for additional environmental activities.

Conclusion
While the science of Phase I and Phase II assessment and investigation processes is not exact, responsible and cost-effective environmental due diligence activities can be performed. To best accomplish this task, all parties should have a clear understanding of what is required under industry guidelines and standards and, if contamination is discovered, be prepared to employ appropriate techniques to fully quantify the problem. Adherence to this process will not guarantee that a property transfer is entirely free of environmental exposure, but it will certainly reduce the risks to all involved parties.