18 Jul Revealed! Demystifying the Phase II Site Investigation
Reading Time: 3 minutesESA commonly answers questions about Phase II scopes of work on a varying scale of complexity. Overall, the questions are aimed at the purpose of a Phase II, what to do if something is discovered, and how to manage the remediation approach in the transaction. One Phase II approach does not fit all, and rarely do we see a common theme across sites, given the unique circumstances of the individual parties and properties involved.
Into the Unknown
After completing a Phase I Environmental Site Assessment (required to establish an innocent landowner defense), based on the findings, ESA may recommend conducting a Phase II Site Investigation of Recognized Environmental Conditions (RECs). At this juncture, the purchaser, under the advisement of their real estate broker and attorney, must decide if they should perform the recommended Phase II with full understanding of the potential consequences of what the investigation may uncover. Questions we often hear our clients ask include, “Will I need to report the issue to the NJDEP?” and “What am I liable for?” These questions originate from an overload of confusing and often contradictory information inherent in the environmental due diligence process. ESA’s answer is to educate the parties involved, providing factual data and professional recommendations aimed at minimizing anxiety and allowing the team to develop a strategic response to the situation.
Because each circumstance is different, there is rarely an “out of the box” solution. Environmental strategies are dynamic, especially when you factor in the risk tolerance, budget, and timeframe of the parties involved. With that in mind, below are some guidelines to help you approach a Phase II transaction. Ultimately, however, it is the job of your environmental consultant to guide you through the process, employing strategies that will help protect your assets and reduce your environmental liability.
LSRP Not Required
Due Diligence Phase II Site Investigations can be performed without retaining a New Jersey Licensed Site Remediation Professional (LSRP). There are pros and cons to having an LSRP on the due diligence project team. However, the environmental firm performing the work should have an LSRP on staff in the event that their input is needed. Having an LSRP on staff who is familiar with the project from the onset can help facilitate the efficient and accurate transfer of information if and when the project proceeds beyond the due diligence phase. It is important to note, however, that an LSRP has a regulatory obligation to report Immediate Environmental Concerns (IECs) and, as such, some sellers may include language in the contract of sale that prohibits the buyer’s due diligence team from including an LSRP. In general, you should discuss the pros and cons of hiring an LSRP for due diligence activities with your broker, environmental professional, and attorney prior to proceeding.
Reportable Environmental Incidents
Because of the potential liability ramifications of a Phase II investigation, the buyer and seller and their respective legal representatives should be contractually clear as to who will order and pay for a Phase II investigation and what information will or will not be disclosed to the interested parties. If a buyer proceeds with a Phase II and their environmental consultant identifies a reportable discharge during the investigation, the buyer is required to report the discharge to the NJDEP only if and when the buyer takes ownership of the property. If, however, the buyer chooses to walk away from the deal, they are not required to report the discharge to the NJDEP. If the seller orders the Phase II, or if they opt to be notified of the results of the buyer’s Phase II investigation and there is a reportable discharge, it is incumbent upon the seller to report the incident to NJDEP.
Proactive vs. Reactive
Before a site is put up for sale, some property owners wisely elect to proactively investigate and remediate. With this approach, a Phase II can potentially be completely avoided. Here’s how:
If the seller fully understands the environmental conditions and impacts at their site, they can opt to go directly to the remediation phase, addressing either the most concerning areas or the entire site before the sale. The more investigation and remediation the seller performs before a buyer puts eyes on the property, the better. In some cases, a buyer will be more agreeable to taking on the remediation portion of a project if the source and extent of the contamination have already been determined through the investigation phase.
Ultimately, a proactive investigation and remediation approach on the seller’s part results in a more valuable “clean” property that can enter into redevelopment much more quickly. In contrast, when negotiating the sale of a contaminated site, buyers commonly add in contingency costs and/or overestimate the cost and time to perform environmental investigation and remediation. This buyer liability management technique often significantly reduces the purchase price by more than it would cost the seller to perform the environmental work themselves.
For more information on this topic, see our previous article, “The Practical Aspects of Reporting an Environmental Discharge.”
Additionally, if you have a specific question about the Phase I or Phase II Environmental Site Assessment or Investigation process, we invite you to AskESA.
Note: While this article contains some legal information, nothing contained herein is intended to represent legal advice. Readers must seek the advice of their own attorney for definitive interpretations on how this information pertains to their particular situations.