Jerry Ostrander

The commercial real estate world is a constant balance of assessing risk, creating investment strategies, and avoiding liability–your first steps could determine how you move forward with your transaction.  In any transaction, you need to determine your appetite for risk. Are you comfortable with the protections and information provided by ASTM due diligence standards or, as an owner or investor, do you want a comprehensive regulatory assessment in order to have a plan to resolve what could possibly be uncovered? Will conducting an ASTM Phase I  offer protection from state specific regulatory liability? What are the potential liabilities associated with not pushing further into the investigative process past the initial ASTM assessment process?  (Spoiler alert!) An ASTM Phase I will does not offer protection from state level regulatory liability in New Jersey.

Limitation of Liability

If you've ever done even a single commercial real estate deal, you are familiar with a Phase I Environmental Site Assessment and the importance of conducting it before buying or selling a property.  Before you sign on the dotted line, you'll need to get a comprehensive picture of the property, by conducting a typical ASTM Phase I which will include a site visit, research historical records, maps, and directories, and a review of local permitting and zoning regulations for the property.

In the State of New Jersey specifically, a Preliminary Assessment (PA) is a regulatory document, which can and should, be done in conjunction with (or in lieu of) an ASTM Phase I.  If you want to obtain protection from potential liability as an innocent land owner (under the NJ Spill Compensation and Control Act N.J.S.A. 58:10-23.11) a Preliminary Assessment is required. Additionally, industrial properties (in most cases) will require a PA to be conducted by the seller prior to closing a real estate transaction pursuant to the Industrial Site Recovery Act (N.J.A.C. 7:26B).

A Preliminary Assessment will cover most of the same items as a Phase I, in addition to a comparison of the environmental contamination (if any) that has been identified, to the appropriate regulatory criteria. Should the PA reveal any Areas of Concern (AOC) that cannot be fully rectified without additional investigation, recommendations can be made to properly address those AOCs in accordance with the Technical Requirements for Site Remediation (N.J.A.C. 7:26E).  Based on the recommendation provided, you, as buyer, can use the information as a negotiating tool with the seller or decide whether the risk—whatever it is—is worth the reward.

Phase I versus PA: Differences Identified

While it might seem a little difficult to discern one from the other, here are some broad strokes of explanation:

1. A Preliminary Assessment covers New Jersey liability (under the Spill Act), while a Phase I covers only federal liability (under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)).
2. A Phase I typically takes 10-15 days while a Preliminary Assessment could take 20-45 days, usually due to the need for mandatory File Review and replies from local and state agencies.
3. Preliminary Assessments are price-based on a variety of factors, including parcel size (and if there are multiple parcels), historical and current use, any associated environmental investigations, and more comprehensive technical review of all. Preliminary Assessments in New Jersey usually include review by a Licensed Site Remediation Professional.
4. A Preliminary Assessment will include recommendations for a Site Investigation if a suspected impact is observed. A Phase I does not require recommendations for further investigation.
5. For ALL industrial or formerly industrial properties in NJ which conduct, or historically conducted activities that are subject to regulation under the Industrial Site Recovery Act (ISRA), a PA MUST be conducted within specific timeframes of a “triggering event”. This is a regulatory requirement of the current property and/or business owner or operator.
6. In a PA, an “order of magnitude” evaluation will be conducted by comparing past investigation results to current regulations and standards.

Which Assessment Is Right For You?

Based on their risk tolerance a lender, seller, or buyer in a commercial real estate transaction may conduct a Phase I as a screening tool to determine possible environmental liabilities at a property; however, a Preliminary Assessment is recommended for an in-depth evaluation of potential state specific regulatory liability.  In the State of New Jersey, it is required to conduct a Preliminary Assessment to protect the buyer and lender from becoming responsible for remediating a pre-existing contamination issue. In order to protect yourself and your asset, engaging a properly licensed environmental consultant is essential to navigating the intricacies of environmental investigation.

Ask yourself:

• Has this property ever conducted industrial activities?
• Has there been or is there currently a documented environmental investigation at this property?
• Am I comfortable moving forward on this transaction without having Purchaser Protection? Would I buy a house without an inspection?

If in doubt regarding a Phase I versus a PA or if you have any additional questions regarding the two, reach out to a local experienced environmental site mitigation consultant to discuss which direction might suit you or your client best.