Our Phase I Environmental Site Assessment (ESA) practice most commonly focuses on pre-loan and pre-acquisition due diligence, but pre-lease Phase I ESAs are common enough. In this blog I seek to highlight the value equation for pre-please Phase I ESAs as well as give users the tools to decide what, if any, environmental due diligence should be done before entering into a commercial real estate lease.
Our pre-lease environmental due diligence clients are often concerned about one or more of the following:
- Establishing a baseline to ensure that they are not blamed for a predecessors liabilities;
- Ensuring that their employees have a safe work environment; or
- The deal is a land lease and they will become de facto owners.
Predecessor’s Liabilities
Industrial clients and dry cleaners should be most interested in pre-lease environmental due diligence when they are taking over an asset that has been used industrially in the past.
I frequently see landlords discover environmental contamination during a financing transaction or a sale transaction and naturally turnaround and blame the tenant. Equally as often the tenant had a predecessor who may or may not have been responsible for the release. The next thing you know, everyone has a lawyer and they are asking me to opine on the age of the plume. A big mess, I assure you.
Save yourself the trouble and do pre-lease environmental due diligence, without it you risk being blamed for the sins of the past.
Safe Work Place
A lot of corporations and risk sensitive lessees are interested in a pre-lease environmental Phase I Environmental Site Assessment primarily to ensure the safety of their employees.
If a site is polluted with volatile organic compounds like benzene, trichloroethylene, or vinyl chloride, these vapors can migrate up through the floors and/or the utilities of the building and get into breathing space. My firm regularly does soil vapor sampling followed by indoor air sampling, and we find it in indoor air. The result in these scenarios is that your employees are breathing air that could result in cancer (according to the toxicologist at least) in an increase frequency….an example of a high level that I find is 500/1,000,000 chance of getting cancer from breathing the air. Causality in these cancer situations can be very complicated, but a responsible employer would not tolerate such risk whether or not you believe the models.
In our field the hot topic for the last 5 to 10 years has been vapor intrusion. When I started in the environmental due diligence business, in the 1990s, we worried more about contamination migrating to groundwater—now we worry more about vapors entering the breathing zones.
Similarly, clients may want us to do an asbestos survey, lead based paint survey, or a radon survey depending on the age and location of the asset.
The best and most common environmental due diligence is the Phase I ESA, but some clients who are only worried about vapor intrusion will ask us for an Indoor Air Quality Survey or a Vapor Intrusion Assessment.
De Facto Ownership
Sometimes my clients find themselves entering into long term land leases or building leases that amount to de facto ownership. In these instances, the clients often just use their pre-acquisition playbook and order a Phase I Environmental Site Assessment.
Whatever the circumstance, I am glad to discuss alternatives with clients prior to their leases. Sometimes the best advice comes in a free phone call.