As the old saying goes, “You get what you pay for.”
When it comes to a Phase I Environmental Site Assessment (ESA) conducted as part of due diligence prior to the purchase or sale of a facility (see previous article), it couldn’t be more true.Although all Phase I ESAs should be conducted by an experienced environmental professional to industry standards (following ASTM Standard E1527-13), the level of quality you actually get can vary widely.
The purpose of the ESA is to help you identify and manage present and future risks from the environmental impact of a facility’s operations. Cutting corners on an ESA is like leaping over stacks of $100 bills to pick up three pennies. What’s the point?
A Phase I ESA is the starting point for most due diligence. If you kick things off on the wrong foot, it can negatively affect the whole due diligence process, leading to serious environmental issues and liabilities being addressed incorrectly or overlooked altogether.
This can impact the real estate transaction – a buyer may not move forward with the purchase or may even ask for a price reduction. In some cases, when problems missed in due diligence are discovered post-sale… it often leads to a dispute (with potential legal action) between buyer and seller to see who pays to address the overlooked issue.
A few years back, we were asked by a client to represent them on the environmental side during the sale of their business and facilities. We were supposed to address any questions from the potential buyer’s environmental consultant during the due diligence process. But there was one question I didn’t expect on our first day working together:
The potential buyer’s environmental consultant asked, “What’s plastic extrusion and injection molding?”
That question really troubled me because the business that was being sold made plastic products used for cosmetics. Plastic extrusion and injection molding were the key elements for that manufacturing process. How can the buyer’s consultant conduct appropriate due diligence if they do not even know what the processes employed at the subject facilities are?
How can you determine what potential environmental issues could arise from such processes due to the raw materials used and waste products produced? How do you understand what potential environmental issues could exist, if you do not even understand the processes that exist? It was very obvious that this engineer (junior-level) had little experience and did not even have the wherewithal to do any research on the subject matter prior to visiting the sites. He didn’t even bother to “Google” it!
Yet, that firm’s client was expecting a quality assessment to be done and any environmental risks and liabilities to be found. And they should have expected to receive a quality ESA since they hired a nationally known environmental consulting firm. Unfortunately, in this case, the potential buyer paid for a name, rather than a quality product.
What occurs in many cases is that these firms have to squeeze their profits from Phase I ESA projects. So, they send junior-level personnel to the job sites to conduct the due diligence work, even though their client is expecting much more than that based on the nationally known name of the firm. Think about that, the most important person in the due diligence process, the person with “boots on the ground and eyes on the site,” sometimes lacks the experience and knowledge-base to conduct appropriate due diligence.
So, before you retain a firm to conduct due diligence for you, ask yourself, what are you really getting as a return on your investment? Make sure you hire an environmental consulting firm based upon the work that they will produce for you, especially for due diligence services, and not based solely on price or name recognition.
I realize that pricing is an important factor in your selection process, but if you are in the market for a Phase I ESA, make sure your consultant includes the following in their cost estimates:
1. A statement that the Phase I ESA will meet or exceed the ASTM Standard Practice for ESAs: Phase I ESA Process (ASTM E1527-13).
2. A thorough site inspection by an experienced environmental professional familiar with both the due diligence process and the respective operations employed at the subject property. Make sure information (qualifications and experience) on the people that will be doing the work is provided.
3. Make sure every area of the property is visited, especially the roof area, and that every door is opened – in other words “Don’t leave any stone unturned.” If an area or areas were not accessible, your consultant must document that in their report.
4. Make sure your consultant tells you how much time they intend to spend at the subject property. A few hours onsite really does not result in a thorough Phase I ESA. We typically spend, at a minimum, an entire day at a site. For larger sites, we could spend multiple days onsite. We feel that’s a minimum for how long it takes to get an understanding of what’s going on there now, and what happened in the past. Otherwise, you could miss significant risks and exposures.
5. Interviews with knowledgeable facility personnel at the site like the facility manager, other managers, maintenance personnel, and key employees, especially the long-time employees who know the place inside and out.
6. A good understanding of the site’s history back to at least when it was first developed through company records, historical photos, and public documentation.
7. A conversation with local, state, and federal regulators about the facility and a review of the facility’s records in the regulators’ files and in a commercially-available database report.
8. Documenting weather conditions at the time of the assessment. If there are six inches of snow on the ground, you won’t see surficial staining or releases. If it was raining and it wasn’t safe to go up on the roof… that’s fair. But your consultant must state in their report the limitations to their investigation.
9. The assessment report should be detailed and should document the whole process and what was identified. The report should represent a “picture in time” of the subject property, because a report with details is much more valuable than one with a generic overview of site conditions. Copies of all information reviewed as part of the assessment should be included in the report.
Getting a thorough Phase I ESA may seem pricey compared to the budget options. But, as you’ve seen, you can’t really compare the two when you look at the quality of the end product.
We always recommend you get competitive estimates from a few environmental consulting companies. Throw out the low-ball offer right away because you won’t get what you want.
When you send out this request for a quote, ask to see the qualifications of the environmental professionals that will actually be doing the work so you can get an understanding of their experience. (This is usually not the same highly qualified person who you spoke with when they submitted a proposal.)
Also, be sure to review the consultant’s contract before you engage them. Find out if they carry sufficient insurance coverage to pay out if a risk or exposure they should have identified, but overlooked, is found later.
If you’re buying or selling a property, now or in the near future, I’d be happy to discuss with you the best way to go about due diligence, including the all-important Phase I Environmental Site Assessment.
If you’ve already had a Phase I ESA done… and you’re now questioning the results, we can help you troubleshoot. We can do a quick review of your report and provide you with our opinion on its content.
You can reach me at firstname.lastname@example.org or (609) 208-1885 so we can set up a time to discuss your situation.