Investor’s Guide to Understanding Phase 2 ESA’s

What Triggers A Phase 2 ESA?

Ok, here is the typical scenario…

A Phase I ESA is conducted for a potential purchaser on a four-tenant retail property.    The assessment discovers that one of the tenants was a dry cleaner from 1940 to 1960.  This is called out as a Recognized Environmental Condition (REC1) in the Phase I ESA report.  A REC is a “red flag” that indicates contamination is likely present.

Investors-Guide-to-Understanding-Phase-2-ESAs-1

How much does a Phase II cost?

Costs are driven by several factors, for example:

  • What are chemicals of concern (volatile organic compounds, metals, pesticides, phenols, etc.)?
  • How extensive is the suspected investigation area (1/4 acre or 3,000 acres)?
  • What is the risk tolerance of the parties involved in the deal?
  • What is the geology of the region (loose sand with groundwater at ten feet or bedrock at the ground surface with groundwater at 100 feet)?
  • Is the site currently under a regulatory program or will it likely fall under one?
  • What are the cleanup goals?
  • Are there any legal or site access issues?
  • What is the use of the site (undeveloped, residential, commercial, or industrial)?
  • How soon does the Phase II need to be completed?

Each of these factors plays a substantial role in determining the cost of the Phase II investigation. Most limited Phase II investigations cost between $3,000 to $6,000. Mid-range investigations range from $6,000 to $15,000 and large assessments (typically under a state-regulated Voluntary Action Program) range from $15,000 to $60,000.

If Phase II Indicates Contamination What Are Some Options?

Even if a Phase II indicates contamination is present, a real estate deal may still proceed—with caution. Below are some options to consider before closing the door:

  • Require owner/tenant to clean up the contamination;
  • Negotiate a lower purchase price;
  • Use the Phase II to establish a baseline of contamination;
  • Pursue liability protection through a state Voluntary Action Program (VAP);
  • Establish an environmental escrow account for cleanup;
  • Purchase an environmental insurance policy; and,
  • Pursue an assessment or cleanup grant fund.

Clickable Footnotes:

1:  A recognized environmental condition or REC is “the presence or likely presence of any hazardous substances or petroleum products in, on, or at a property: (1) due to any release to the environment; (2) under conditions indicative of a release to the environment; or (3) under conditions that pose a material threat of a future release to the environment.”

2: Perchloroethylene is a colorless, nonflammable liquid with a sweet odor. It is also known as tetrachloroethylene, PCE, or PERC.

3:  A solvent leak dripping at a rate of one drop per second will result in 320 gallons per year. One tablespoon of PCE is enough to contaminate a million gallons of water above the drinking water standard of five parts per billion (ppb).

4:  According to EPA, the average dry cleaner cleanup ranges from $400,000 to $500,000 but can be as high $3 million when groundwater is impacted.

Photo source:  https://www.floridamemory.com/fpc/TD/TD01057.jpg

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