August Mack Newsletter | January, 2018

Not All Environmental Due Diligence is Equal
by Curtis Chapman

Depending on your perspective, borrower, lender, current owner, or perspective owner, one environmental due diligence device does not fit all transactions. There are three forms of environmental assessments that can be used to evaluate environmental liabilities of real property:  a Desktop Environmental Assessment; a transaction screen process (TSP); and, a Phase I Environmental Site Assessment (ESA).  Each of these assessments has an appropriate use, which be discussed in the following paragraphs.  But before we discuss where these assessment tools are appropriate, let us briefly discuss each assessment protocol. 

The simplest of these tools is the environmental Desktop Environmental Assessment (Desktop Assessment), which is a limited environmental review intended to evaluate the environmental risk level of a property without a property inspection.  Some lenders use other names for the Desktop Assessment such as Record Search and Risk Assessment (RSRA), Transaction Screen Assessment (TSA), or Environmental Risk Review (ERR), among others.  This type of environmental review is literally done at one’s desk and consists of a search of historical use records such as aerial photographs, city directories, and/or fire insurance maps covering the subject and adjoining properties.  Also included in the Desktop Assessment is a review of federal and state government environmental databases for issues such as leaking underground storage tanks (LUSTs) and Superfund sites associated with the subject and adjoining properties.  Based upon the desktop review, an environmental risk is assigned to the property consisting of a ”low risk”, “elevated/medium risk”, or “high risk” for environmental contamination. 

The second transaction tool in the environmental professionals’ toolbox is the Transaction Screen Process (TSP), which is also called a Limited Environmental Review (LER), Mini-Phase 1 (MP-1), Environmental Risk Review-1, or TSA II.  TSP standard was developed by the American Society for Testing and Materials (ASTM) in 2000 and updated in 2006 and 2014.  The TSP was established to be conducted by just about anyone including a lender, broker, appraiser, or environmental professional.  For the non-environmental professional to use the TSP, a structured questionnaire was developed as part of the ASTM standard which is completed by the current owner and occupant of the subject property, as well as the party inspecting the property.   A review of historical use records and government environmental databases pertaining to the subject and adjoining properties are also elements of the TSP.  Based upon the answers to the questionnaire and the inspection, as well as the regulatory and historical review, the preparer (user) must render an opinion whether the information gathered during the TSP has revealed a Potential Environmental Concern (PEC), which is a possible presence of a release (existing or past) of any hazardous substance or petroleum products.

The third transaction device, and the one most people are familiar with, is the Phase I Environmental Assessment (ESA).  The Phase I ESA includes all the elements of the Desk Top and the TSP, as well as completion of additional questionnaires, reviews of municipal and county files, conducting searches for recorded environmental cleanup liens, and completing regulatory file reviews for the subject and/or the adjoining properties where a release has occurred.  The Phase I ESA Standard was again, like the TSP, established by ASTM in 1993 and has been updated five times since.  In addition, the Environmental Protection Agency (EPA) in 2005 promulgated rules to establish standards for “All Appropriate Inquiries” (i.e., tasks in a Phase I needed to establish protection from environmental liability).   Simply put, the Phase I ESA is the only one of the three environmental due diligence protocols that provide a new owner of a property liability protection (both federal and state) from environmental obligations associated with past releases on the property.  Of course there may be other steps, such as a Phase II and a Baseline Environmental Assessment (BEA), which a prospective owner may need to complete to document their liability exemption.

It is at this point where the conflict between borrower’s and lender’s need for environmental due diligence comes into play.  The level of environmental due diligence that is satisfactory for the lender, may not be appropriate for the borrower if he is a prospective owner.  The difference is that the lender is not seeking liability protection with environmental due diligence but using it to assess the business risk of accepting the real property for loan collateral.  This the same reason a lender will engage a title search, a survey, and an appraisal.  If you are purchaser of property, you are the party that will require a Phase I ESA to qualify for full exemption from environmental liability.  You cannot rely on the defense that the bank did not require you to do Phase I as a requirement of providing the loan to purchase the property.

If you are already an owner of the property and are seeking to refinance an existing loan or borrow against the value of the property, then one of the other two more limited diligence tools may suffice.  At that point, it may too late to seek environmental liability protection, if not done at time purchase, or is not be needed because it’s already been done.  At this point, the Desktop Assessment or TSP may suffice to evaluate the impact to collateral by potential environmental impacts to the property.

Thus, all environmental due diligence is not the same.  Let the buyer and/or buyer beware.  From prospective purchaser to the current owner, appropriate environmental due diligence can vary widely along with its purpose.  The perspectives of environmental due diligence of parties on either side of a loan, borrower vs. lender, are not always the same.  Don’t count on a lender to act as your environmental advisor when it comes to environmental due diligence.  What may be right for them, may be very wrong for you and could lead to potentially costly consequences that you, not the lender, will have to bear.


Curtis Chapman is a project manager with August Mack Environmental, Inc. in the Livonia, Michigan office. He specializes in property assessment, subsurface investigations, remedial project management, regulatory compliance, soil/groundwater remediation, and waste minimization. Curtis can be reached at 734.464.1716 or via e-mail at cchapman@augustmack.com.


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