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The Commodification of Phase I ESA’s and the Need for Innovation

Introduction

Individuals who read environmental site assessments (“ESAs”) in the early 1990’s as part of their job will likely remember the unevenness of recommendations and conclusions and the wide range in the quality of reporting.  During that time, as an in-house environmental engineer at a major law firm, I likely read more ESA reports from more environmental consulting firms than I care to remember.  To this day I still read my fair share of ESA reports from various consultants as part of my job.

Standardization

In the 1990’s there was a growing demand from users of ESA reports for some form of standardization.  Back then, and to this day, a potential buyer of a property and the associated lender used an ESA report to aide in determining the monetary risk associated with any environmental liabilities linked to a property.  The wide variety of styles, coverage, disclaimers, recommendations, and conclusions in ESA reports back in the early 1990’s made that task very hard.

More than one consultant in the 1990’s would try to absolve themselves of liability by merely stating the findings of the investigation and avoiding any recommendation or conclusions.  Others would include disclaimers that would essentially hold them blameless for all errors and or omissions.

The first standardized ESA reports that came across my desk conformed with the United States ASTM E1527 standard published in 1993.  The first Canadian ESA standard (Z768) was issued in 1994 by the Standard Council of Canada.

In Canada, the latest version of the CSA Z768 standard is what is used as starting point for conducting Phase I ESA’s.  A vast majority of ESA reports that I read begin quoting the CSA standard but with the added qualifying statement that the report is in “substantial conformance” with the standard.

Commodity

Currently, many of the major lenders in Canada have lists of approved consultants for ESA’s.  Any borrower can choose freely from the list and arrange for an ESA on a property.  Other organizations have similar lists.

The CSA Z768 standard combined with the lists of qualified consultants typically supplied by lending institutions has created, in my opinion, a commodification of Phase I ESA’s.  An unsophisticated and occasional user of environmental services would most likely choose a consultant to conduct a Phase I ESA based on price.

Sophisticated buyers of environmental services have their own favourite consultants.  To earn the trust of a regular user of ESA services, a consultant needs to be able provide a clear explanation of environmental liabilities and a strong justification for the need further investigation (i.e., Phase II ESA).  The exemplary consultant has the ability to uncover the less than obvious environmental liabilities.  All trusted consultants provide timely report in a cost-effective manner.

The advantage of the sophisticated buyers of ESA services is the experience gained from reading reports from dozens of different firms and knowledge of the revelations and oversights of each.  Even amongst sophisticated buyers, there is a level of commodification that exists as they would likely have anywhere from 4 to 5 firms (any maybe more) that they trust to do good work.

Differentiation

When being sold environmental services from consultants, I typically ask a consultant what differentiates them from their competitors with respect tot the conduct of a Phase I ESA.  In essence, I want them to articulate to me how their ESA work is superior to the competition.  The typical list of replies can be found in the table below.  Based on the majority of responses I receive, it is my conclusion that the consultants themselves are unknowingly conceding that they are selling a commodity service.  The differentiators they describe can apply to almost any firm that provides the service.

Table 1: Common Reasons Cited by Environmental Consultants for Choosing Them

“Cost effective”

“better”
“Fast turn-around time” “more effective”
“Use only experienced assessors” “more thorough”
“Experienced reviewers and supervising Staff”

“quality controls”

Innovation

So how can a consulting firm give clients what they want – more certainty on risk associated with a property – and differentiate the ESA service they provide?

I have found one consultant that I now work with has risen above the commodity Phase I ESA.  This consulting firm, through innovation, has gone beyond the bare minimum of a Phase I ESA that would conform to the CSA Standard and utilized technology to enhance the Phase I ESA.

A standard Phase I ESA requires only observation as part of the site visit portion of the ESA.  The use of intrusive testing is saved for a Phase II.  However, with the utilization of field instrumentation that is non-intrusive, an enhanced Phase I can provide much more information that a standard Phase I ESA.

The environmental consulting firm, Altech Consulting Group, uses magnetic surveys as a standard part of the its Phase I ESAs.  A magnetometer measures the magnetic potential underground through non-obtrusive means.  It can identify the presence of underground steel tanks or drums, and other ferrous buried objects (i.e. pipes).

Enhanced Phase I ESA – Seeing underground with the magnetic survey

By including a magnetic survey as a standard part of a Phase I ESA, Altech has more information from which to base its conclusions and recommendations.  It can utilize the information found from the magnetic survey along with historical data and interviews with persons knowledgeable of the property to have a stronger argument for the need for a Phase II ESA or not.

Chad Stewart, the head of the environmental investigation group at Altech stated “one of the biggest sources of environmental liability at the majority of sites is leaks from underground storage tanks or pipelines.  By including a magnetic survey as part of our Phase I ESA, we are in a much better position to state if further intrusive investigation is required.  Our approach saves the client time and money.”

As I said earlier, I have seen my share of ESA reports from numerous consultants.  Their a some that are very quick to recommend a Phase II ESA based on the limited information that only hints that a UST may have been present.  A vast majority of the subsequent Phase II findings reveal that there is no contamination.

Any means of bringing non-intrusive testing and measurement techniques into use for a standard Phase I ESA is a good thing in my opinion.  The more information that can be obtained during the Phase I ESA, the better the decision making on the need for a Phase II.

By not having to perform an unnecessary Phase II ESA, a client could save tens of thousands of dollars.  By performing a Phase II ESA based on information obtained from a magnetic survey that is a standard part of a Phase I ESA, a client could potentially save hundreds of thousands of dollars.

U.S. EPA Approves Use of Updated ASTM Phase I Standard for Specific Properties

ASTM International recently updated its Phase I environmental site assessment standard for assessing large rural and forestland properties.  This Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process for Forestland or Rural Property, E 2247-16 (2016 rural property standard), replaces a 2008 version, numbered E2247-08. Purchasers of real property who intend to use the rural property standard for a closing on or after March 14, 2018, must use the 2016 standard.

Proposed purchasers seeking to establish the innocent purchaser, bona fide prospective purchaser or contiguous property owner defenses under the Comprehensive Environmental Response, Compensation and Liability Act must comply with the United States Environmental Protection Agency’s (U.S. EPA’s) All Appropriate Inquiries (AAI) standard at 40 C.F.R. pt. 312 prior to the purchase of the property.  While purchasers may follow the AAI criteria set forth in the regulations, most purchasers follow either the E1527-13 Phase I standard (defined below) or the 2008 rural property standard when performing pre-purchase Phase I environmental site assessments, as both standards are specifically identified in the regulation as satisfying AAI.

Effective March 14, 2018, the 2016 rural property standard replaces the 2008 standard for use in meeting AAI under EPA’s regulation. (Purchasers of real property who intend to use the rural property standard for a closing before March 14, 2018, however, may still use the 2008 standard.)  This change is of particular importance to solar and wind projects proposed for large tracts of rural and farmland property, as it allows for less rigorous onsite assessment than the site visit requirements used for assessing commercial and industrial properties, Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process, E 1527-13 standard.

Since Phase I environmental site assessments originated in 1986, the review of large rural and forestland properties has been difficult and time-consuming due to the site reconnaissance requirements alone.  The 2008 rural property standard alleviated some of the difficulties in the site reconnaissance requirements for assessing large rural tracts of property, as more particularly described in an earlier summary.

The 2016 rural property standard adds updated terminology that is used in the companion E1527-13 standard, but more importantly, changes some language that limited the more widespread use of the 2008 version.  First and foremost, the 2016 rural property standard eliminates the somewhat arbitrary 120-acres-or-more size requirement for use of the standard and simply requires the property to be “forestland” or “rural property.”  The standard includes a much broader definition of rural property, allows some alternative sourcing for agency records, and designates a specific time limit of 20 calendar days for receipt of materials requested by the consultant for review in completing Phase I.  The 20 calendar days requirement offers the benefit of an outside time limit, but also ensures that a Phase I environmental site assessment will take at least 20 days to complete if requested documentation is not received earlier. The 2016 rural property standard also relaxes some of the site visit criteria.

United States: New Standard Of Care Document On Environmental Due Diligence (“Phase I”)

Article by Jerrold Samford and Andrea L. Rimer

Troutman Sanders LLP

The GeoProfessional Business Association (GBA) – formerly known as ASFE – recently released a new study on the standard of care for conducting Phase I environmental site assessments.  This document is the fourth in a series of studies the organization has produced since the inception of the due diligence process in the early 1990’s.  The study is an evaluation of approximately 200 Phase I reports from across the country, written between 2007 and 2010. The results of the study will be a valuable tool in determining whether a Phase I conducted during that time period meets the standard of care or not.

In completing the study, the GBA compared the Phase I reports to the elements of the ASTM Standard E1527-05, applicable during the time period of the reports, to see whether the reports included the elements of the ASTM standard. Although nearly all of the reports stated they were completed in accordance with the ASTM Standard, the committee reviewing the reports concluded that not a single report actually complied with every component required by the Standard. Consequently, the GBA study finds that strict compliance with the ASTM standard does not constitute the standard of care for conducting Phase I evaluations of commercial real estate.

The committee’s conclusion could become critical in legal actions where the issue at hand is whether appropriate environmental studies were completed prior to completion of the transaction. The GBA study could be used to show a court that because strict compliance with the ASTM Standard is not commensurate with the standard of care, a purchaser could still be in compliance with the All Appropriate Inquiry provisions of CERCLA even if some of the elements of the ASTM Standard had not been completed.

The study is available through the GeoProfessional Business Association at www.geoprofessional.org.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

This article was first published on the Troutman Sanders website.

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About the Authors

Jerrold “Jerry” Samford is an environmental compliance specialist at Troutman Sanders.  He is a certified professional geologist in the State of Virginia, a licensed professional geologist in the States of North Carolina and Kentucky.

Andrea L. Rimer is a partner at Troutman Sanders.  She has a national practice representing clients on transactional and regulatory matters involving brownfields redevelopment, hazardous site investigation and cleanup, hazardous waste management, and state and federal Superfund and voluntary remediation programs.

 

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