Should Phase I Environmental Site Assessments be Priced as a Commodity?

Synergy Environmental, Inc.
Brian K. Loughnane, PG

April 20, 2016

The short answer is no. Yet it’s very common within the environmental due diligence market for certain purchasers or lenders to treat a Phase I Environmental Site Assessment (ESA) as a one unit price commodity good.  To examine the differences between a commodity good and a Phase I Environmental Site Assessments let’s review the definition of both a commodity and Phase I ESA.

Wikipedia defines the term commodity” as an economic good or service when the demand for it has no qualitative differentiation across a market.  More specifically the market treats its instances as equivalent, or nearly so, with no regard to who produced them.  Examples are a bushel of wheat or a dimensioned piece of lumber.  Basically a purchaser of one of these items is not influenced by where it originated or who originated the item.  As an example in most marketplaces no one asks “where did the wheat in the bread one eats originate?”

Let’s look at Wikipedia again, the term “Phase I Environmental Site Assessment” is described as a report for a commercial real estate holding that identifies potential and existing environmental contamination liabilities.  The Phase I ESA is generally considered the first step in the process of environmental due diligence. Standards for performing a Phase I site assessment have been promulgated by the US EPA and are based in part on ASTM in Standard E1527-13.  The Phase I ESA report identifies potential and existing environmental contamination liabilities.  The Phase I ESA is conducted to ensure that a new purchaser is afforded liability protection.  As described within Wikipedia interpreting the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), the U.S. courts have held that a buyer, lessor, or lender may be held responsible for remediation of hazardous substance residues, even if a prior owner caused the contamination; performance of a Phase I Environmental Site Assessment, according to the courts’ reasoning, creates a safe harbor, known as the ‘Innocent Landowner Defense’.

Now that we’ve defined both the terms let’s try to gain a better understanding as to why unit pricing of a commodity, such as a bushel of wheat, is very different than unit pricing of a Phase I ESA. The price of a bushel of wheat is typically set by a commodities market.  A kernel of wheat is the same as all kernels of wheat.  As described within ASTM Standard E1527-13 a Phase I ESA has four basic components: records review; site reconnaissance; interviews and a report.  The volume of the records, the size and location of the site, the number of individuals to interview and the content of the report all influence the extent of the investigation and therefore the price of a Phase I ESA.  So basically the effort varies from site to site.  That means the cost varies from site to site.  The hope is for an everlasting “Innocent Landowner Defense”. Not putting the proper effort into the site assessment can impact the validity of the “Innocent Landowner Defense”.

I provide these lasting thoughts:

  • Do not treat the property transaction or the Phase I Environmental Site Assessment as a commodity item. Realize that each one is unique and therefore requires a unique effort.
  • Speak with your Environmental Due Diligence (EDD) consultant on how they intend to perform a records review; site reconnaissance; interviews and a report.
  • Concerning your EDD consultant, do they have the capability to perform a Phase II ESA if needed?
  • Hire an experienced EDD consultant. I would recommend considering a company which has been in the industry for, at least 7 years. And who is projected to be in the marketplace for at least the next 10 to 20 yrs.
  • Make sure the EED you hire has the proper limits on their Environmental Liability Insurance. Request a Certificate of Insurance from your EED to confirm coverage.
  • Give sufficient time to perform the ESA. Typically 4 to 8 weeks is adequate dependent upon the situation.  Less time is the exception and should not be the rule.  Less time typically produces data gaps within the Phase I ESA.  Don’t manipulate a Phase I into having data gaps due to a schedule which is too tight.
  • Be aware that ASTM E1527-13 cites allowing 20 days for obtaining records data. I strongly recommend that any thought of a 3 week deadline for a Phase I ESA should be cleared from one’s mind.
  • Be wary of Phase I reports which cite many data gaps. Within ASTM E1527-13 there is a definition for data gaps.  Recognize that within the definition for data gaps the term “good faith efforts” is utilized.  Don’t allow your EDD consultant to cut corners on their Phase I ESA by constantly invoking the term Data Gaps for tasks which should normally be performed.
  • Before contracting you EDD consultant ask for a cost breakdown on how the Phase I ESA will be performed. If they can’t explain how they can perform a site visit, records review, interviews and write a report for the cost provided, one must question if corners are being cut.

Respect the Phase I Environmental Site Assessment Report and its findings as a true picture of your future property, rather than just a box to be checked when applying for a loan.

Mr. Loughnane is a Professional Hydrogeologist and Director of Geosciences at Synergy Environmental. He works out of the Royersford, PA Office.

 

Print Friendly