Recently our organization, Expedited Environmental Services, conducted a market evaluation and reached out to our existing clients to determine the strength and weaknesses of the environmental consulting industry. Based on our evaluation, it was brought to our attention by multiple commercial real estate brokers and mortgage brokers that the Phase I Environmental Site Assessment is rarely being conducted becauseeitherthe buyers of the transactions are purchasing the property as a cash transaction,and/or the lending institution is only requiring a Transaction Screen that follows the American Society of Testing Materials (ASTM) E1528-06 – Standard Practice for Limited Environmental Due Diligence: Transaction Screen Process to fund the transaction.
The utilization of a TS for this purpose shocked our company, not because the potential owner is bypassing the Phase I Environmental Site Assessment by paying cash, but because the lending institutions did not learn a valuable lesson from the economic turmoil that effected so many of us. Without the proper environmental due diligence, the lending institution is potentially lending to an owner of an environmentally impaired property in which the owner may not have the capital to remediate. This leaves the bank holding a bad note once again. What is also shocking is that the insurance underwriters are still offering insurance for these properties that have not conducted the proper environmental due diligence. This, in turn,creates a costly risk of an environmental remediation.
According to ASTM E1528-06,the purpose of a TS,as extracted from the actual standard,indicates the following:
“The purpose of this practice is to define good commercial and customary practice in the United States of America for conducting a transaction screen for a parcel of commercial real estate where the user wishes to conduct limited environmental due diligence (that is, less than a Phase I Environmental Site Assessment). If the driving force behind the environmental due diligence is a desire to qualify for one of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) Landowner Liability Protections (LLPs), this practice should not be applied. Instead, the ASTM Practice E 1527 for Environmental Site Assessments: Phase I Environmental Site Assessment Process, may be used.”
“The user is advised that this practice will not satisfy the practices that constitute all appropriate inquiries into the previous ownership and uses of the property consistent with good commercial or customary practice as defined in 42 U.S.C. 9601(35)(B) to establish the CERCLA LLPs.”
Furthermore, ASTM E1528-06 Subsection 1.2.2 states:
“This practice does not address requirements of any state or local laws or of any federal laws. Users are cautioned that federal, state and local laws may impose environmental assessment obligations that are beyond the scope of this practice. Users should also be aware that there are likely to be other legal obligations with regard to hazardous substances or petroleum products discovered on property that are not addressed in this practice and may pose risks of civil and/or criminal sanctions for non-compliance.”
The general purpose of a TS is nothing more than what the name states. It is a general screening of the property. A TS is not a comprehensive environmental document as is a Phase I ESA conducted according to ASTM E1527-05. As such, there will be no protection for the new property owner, underwriter and lending institution if contamination is found and the only environmental due diligence that was completed was a Transaction Screen. The true protection comes from conducting a comprehensive Phase I ESA according to ASTM E1527-05.
The above is stated inASTM E1527-05 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process:
“The purpose of this practice is to define good commercial and customary practice in the United States of America for conducting an environmental site assessment of a parcel of commercial real estate with respect to the range of contaminants within the scope of Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) (42 U.S.C. 9601) and petroleum products. As such, this practice is intended to permit a user to satisfy one of the requirements to qualify for the innocent landowner, contiguous property owner, or bona fide prospective purchaser limitations on CERCLA liability (hereinafter, the “landowner liability protections,” or “LLPs”): that is, the practice that constitutes “all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice” as defined at 42 U.S.C. 9601(35)(B).(See for an outline of CERCLA's liability and defense provisions.) Controlled substances are not included within the scope of this standard. Persons conducting an environmental site assessment as part of an EPA Brownfields Assessment and Characterization Grant awarded under CERCLA 42 U.S.C. 9604(k)(2)(B) must include controlled substances as defined in the Controlled Substances Act (21 U.S.C. 802) within the scope of the assessment investigations to the extent directed in the terms and conditions of the specific grant or cooperative agreement. Additionally, an evaluation of business environmental risk associated with a parcel of commercial real estate may necessitate investigation beyond that identified in this practice.”
Accordingly, TS’s should only be conducted for individuals that are looking for a property to determine the right fit and are worthy of moving forward with a Phase I ESA. One would think that the commercial real estate community learned from the past and provided themselves, their clients and their companies with the best possible, defendable product available,such as a Phase I ESA. Instead, the commercial real estate community is worrying about saving a few dollars by using a simple, non-enforceable TS. This negligence could open a party to extensive remedial action and litigation costs, which could have been avoided by conducting a Phase I ESA.It is the real estate community’s responsibility to provide clients with the appropriate advice and products that are not only accurate but will afford our clients with protection from potential future litigation and remediation costs.
— Greg C. Moriates is president of Expedited Environmental Services, Inc.