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.
Why is contamination likely? Dry cleaners of this period used chemical solvents which often included perchloroethylene2 (aka, “PERC”) and other hazardous chemicals. The release of a very small amount of PERC over time at a dry cleaner has the potential to impact soil and groundwater beneath the site3 and could even contaminate the air inside the building or the surrounding buildings.
If no further assessment activities are conducted following the Phase I ESA process, the purchaser could be on the hook for all the cleanup activities, should a release be discovered by others down the road. This happens frequently. Investigations and cleanup of dry-cleaning solvents can easily cost hundreds of thousands to several million dollars4. Drycleaners are not the only environmental concern, of course. Gas stations, printing facilities, landfills, historic hat makers, golf courses, shooting ranges, various other commercial businesses, and many industrial facilities use chemicals that can cause contamination of soil, groundwater, or other media. Before property transfer occurs, it is important to know enough about the environmental use and history of a site. Without this environmental due diligence, you can be on the hook for some or all of the cleanup costs, even if you didn’t cause the problem.
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.
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