Why Does My Bank Want a Phase I Environmental Site Assessment?

Environmental liability is not imaginary. There is no way of eliminating the risks, but they can be greatly reduced and managed by relying on a qualified firm to perform a site assessment or Phase I Environmental Site Assessment.

Think of your property (an investment) to be part or whole of your personal financial lifeboat. Just as lifeboats are not designed to be dragged through hilly dunes, mortgages are not designed for tough economic conditions such as an environmental problem. Like the seafarers below, you and your lender must work together to ensure the success of your loan. Your bank’s success depends on your success…it’s a team effort. With cooperative effort your financial lifeboat will reach open water and you’ll be free sailing. Or rowing, actually, if you want to follow through with the lifeboat analogy.

Lifeboat Dunes

The Lifeboat is Taken Through the Dunes, 1883, Ancher, Michael (1849-1927)/© Used with Permission by Curatorial Staff through Wikipedia, Staten Museum for Kunst, Copenhagen, Denmark.

Why  Does My Bank Need a Phase I Environmental Site Assessment to in Order to Get My Loan?

Most commercial lenders require that prior to disbursing funds on a real estate-banked loan that the property get a Phase I Environmental Site Assessment. The reason banks need the environmental assessment is to protect themselves in the event of a future loan default or non-performance (foreclosure). Your bank is seeking some degree of certainty that if they have to foreclose that the property will not represent an environmental risk to them. Moreover, your bank does not want you to accidentally buy a problem property. It is really in both your and your lender’s best interest to satisfy environmental due diligence with a Phase I Environmental Site Assessment before proceeding with the transaction.

Environmental Due Diligence Was Defined in the Early-1990s

In and about 1994, the American Society for Testing and Materials (ASTM) and the U.S. EPA developed recommended methods for performing environmental site assessments. These standards explore approximately the same investigative protocols and resources. Be that as it may, for an ESA to truly be effective, those who design it need flexibility to adequately consider the unique set of factors created by the site itself and your own particular risk management objectives.

Hire The Best Environmental Consultant You Can Afford

Contract a qualified, experienced, and appropriately insured environmental assessment firm. The costs associated with contaminated property can be huge, and you may be forced to assumed the costs alone. Conventional insurance generally does not pay for environmental cleanups; most policies specifically exclude pollution coverage. Even with costly and time-consuming litigation, you may be unable to force the prior owners and polluters to pay.  The option of abandoning the site is likewise unavailable to you.

Be Mindful That a Phase I Environmental Site Assessment Reduces, But Does Not Eliminate, Environmental Risk

Although reliance on an environmental profession assists in managing your risk, it will not eliminate your environmental risk. Environmental professionals who perform ESAs are engaged to “determine the likelihood” of a property being impacted by latent or hidden subsurface environmental problems. If environmental professionals were clairvoyant or had ESP, they would know exactly where to look and what testing to perform. Observations and speculations are not scientific certainties, and even the most exhaustive professional assessment may not identify all existing conditions. The environmental consultant serves as your professional advisor and provides insight and opinions based on their experience and judgment. In brief, your environmental professional identifies potential environmental risks, they do not assume them for you. The Phase I Environmental Site Assessment is not an insurance policy.

Carefully Evaluate How Your Environmental Consultant Manages Their Own Risk

Many firms are not run by risk management geniuses. Many will certainly accept even the worst contract conditions. Although such a firm may seem easy to control, they may not be the best choice. Any firm that seemingly disregards its own potential risks will likewise not worry much about yours. They have a different agenda than you do. Many firms springing up hither and yon are not even insured to perform the work they’re selling to you. Extra care is warranted here; they won’t be able to fulfill their contractual agreements with you. It seems counter-intuitive, but the companies with contracts with teeny print at the end are most often the best ones to hire because they’re managing both your and their own risks.

Your Environmental Consultant Should Be Able to Clearly Explain Environmental Risks

There is an old saying that only if you truly understand something can you teach it well. The same applies to environmental risk. It is essential to work with a consultant who understands the risks involved, who can explain them to you clearly, and who can competently apply appropriate technical measures to reduce those risks to levels you can tolerate.

Don’t Leave Your Family, Friends, and Other Loved Ones Environmental Time Bombs

Probably one of the best pieces of advice with give to clients is to remind them that one day they may be selling a property or leaving a property to a spouse, a child, or some other loved one. Among the best expressions of consideration you can offer is leaving behind a property that has been thoroughly evaluated and found environmentally acceptable. There is no substitute for doing it right.

Don’t Be Afraid to Be Part of the Process; It’s Your Risk and Your Money Paying for It

On some occasions you may possess some specialized site knowledge that tells you a given property is contaminated, and what the property is contaminated with. You may understand what your potential risks will become once the information becomes public. For these and other reasons,  work with your environmental professional to design the best scope of service to meet your risk management objectives.

What your Phase I Environmental Site Assessment will cost is determined to some degree on the scope of work and risk allocation.  Key factors within the risk allocation aspect of the Phase I Environmental Site Assessment are certifications, indemnifications, limitations of liability, and third-party reliance on the consultant’s report.

No Properties are “Certified Free of Hazardous Substance Contamination”

Almost all environmental professionals will refuse to certify or warrant that a given property is free of hazardous substance contamination. Contaminants may be present themselves in areas that were not explored or tested or may migrate to areas that theretofore tested clean. As a result, a thoughtful environmental professional can only provide an opinion. arguments may be made that certifying a property contaminant-free is an act of professional negligence.

Remember For Whom The Phase I Environmental Site Assessment Is Being Prepared

The context under which a Phase I Environmental Site Assessment is being prepared and for whom the report is being prepared for may have a significant impact on the content. Third party reliance is another significant concern, arising whenever a third party, such as a bank, law firm, or developer requests a document specifying they can rely on the environmental professional’s findings and conclusions just the same extent as the original client. Unless this third party and the environmental professional enter into their own contractual agreement, such arrangements may create major liability exposures for the environmental professional. These concerns can be avoided just by informing the environmental professional that a third-party reliance issue may occur.

Select a consultant with care. If you are already working with a quality firm, stick with them. Otherwise, obtain referrals and ask firms to submit information about their themselves, their experience, and the programs they use internally to prevent losses and elevate quality. Contact people these firms have served to determine their satisfaction with the service they received. After meeting with several firms, identify the one with which you feel most comfortable and begin discussion of the work involved, the risks, and the services available. In that way you can formulate a contract and workscope that make your understandings clear, and help establish a client-consultant relationship based upon mutual understanding, respect, and trust.

To reduce your risks, incorporate into your selection/retention method a process that allows you and your consultant to develop the scope of service together and engage in a comprehensive discussion of the project. A selection/retention method that discourages shortcuts and other forms of cheap engineering can also reduce your risks.