The Commercial Real Estate Informational Portal

Welcome to

Welcome to the Commercial Real Estate Expert Blog! A host of industry leading real estate professionals, lawyers, and consultants providing the latest in real estate relevant news and advice.

Business Environmental Risk in Phase 1 ESAs

When performing a Phase 1 Environmental Site Assessment, the environmental professional is wise to ask enough questions of their client to understand their business plan and the intended use of the property.   Most Phase 1 ESAs adequately advise clients on the presence or absence of recognized environmental conditions, but the better environmental professionals also advise their clients on business risk.

What is Business Environmental Risk?

Business Environmental Risk is defined by ASTM E1527-2005: Standard Practice for Environmental Site Assessments: Phase 1 Environmental Site Assessment Process:

“Business environmental risk—a risk which can have a material environmental or environmentally-driven impact on the business associated with the current or planned use of a parcel of commercial real estate, not necessarily limited to those environmental issues required to be investigated in this practice. Consideration of business environmental risk issues may involve addressing one or more non-scope considerations, some of which are identified in Section 13.”

“Business Environmental Risk” includes items that are outside of the scope of CERCLA liability (Comprehensive Environmental Response, Compensation and Liability Act, the defense from which is the primary purpose of a Phase 1 ESA).  Many other laws can impose liability on a property owner or operator, such as the Resource Conservation and Recovery Act (RCRA), the Toxic Substance Control Act (TSCA), Clean Water Act (CWA) and numerous state and local laws.  Additionally, many health and safety concerns, natural resource concerns and 3rd party liability would be considered Business Environmental Risks, as they are not covered by CERCLA and are not required to be discussed in the Phase 1 ESA.

The common non-scope business risk items referred to in the ASTM definition include:

  • Asbestos
  • Lead Paint
  • Lead in Drinking Water
  • Radon
  • Wetlands
  • Ecological Resources
  • Endangered Species
  • Cultural and historic resources
  • Regulatory compliance
  • Industrial Hygiene
  • Health and Safety
  • Indoor air quality
  • Biological agents
  • Mold

Business Environmental Risk Depends on the Client and Property Type

Business Environmental Risks must be identified based on the client’s unique needs, which requires discussion with the client regarding their particular risk exposure (based on the property, current and future use, and the client’s line of business), their risk tolerance and any mitigating factors (such as environmental insurance or indemnity).  Good environmental consultants will communicate with the client up front to understand whether these business risks may be of concern and require evaluation.

For example, lenders might be concerned with erosion occurring on unfinished, pre-foreclosure residential developments, which can result in hefty fines for sediment pollution.

A healthcare REIT might be concerned with biohazard waste handling. A multi-family REIT is likely concerned with mold and indoor air quality

A developer converting an old auto shop into a restaurant may require an evaluation not just of potential contamination in the ground, but also whether asbestos is present in the building to be demolished.

Industrial clients may require OSHA and other compliance audits.

Evaluating Business Environmental Risks

For those concerned with these business risks, a Business Risk Phase 1 ESA can incorporate the specific evaluations into the Phase 1 ESA scope, or they can be evaluated as an additional service done in tandem.  Many of these items require specialist evaluations, such as a certified asbestos inspector or biologist.  There are many services designed to specifically address non-scope items in fuller detail, such as compliance audits, or National Environmental Policy Act (NEPA) reviews and State Historic Preservation Office (SHPO) consultation regarding natural and historical resources.  Some consultants feel that business risk items should be evaluated separately from the Phase 1 Environmental Report, so as not to cause confusion. This should be decided through discussions with the client.

For environmental professionals, the bottom line is to understand the client’s needs and evaluate their environmental risk, not just to determine “REC” or “No REC”. If that goes beyond the standard Phase I ESA scope, then the consultant should be nimble and provide professional insight accordingly at an early stage.  

Clients look to environmental consultants for professional judgment, and that judgment begins at the outset of the client-consultant relationship, not just at the end of a report.