Environmental Analysis for Real Estate

Environmental Site Assessments: Phase I and Phase II Explained

The Role of Environmental Site Assessments in Residential Real Estate


Environmental site assessments (ESAs) can be used in residential real estate transactions, but they are more commonly used in commercial or industrial real estate.

The reason for this is that commercial or industrial properties have historically had a higher likelihood of environmental contamination due to the nature of the businesses or activities conducted on those properties.


However, there are situations where an ESA might be conducted for a residential property. For instance:


  1. If the residential property is being converted from a commercial or industrial use, or is adjacent to such a property.
  2. If the home is located in an area known to have environmental contamination issues, such as near a landfill, industrial plant, gas station, or dry cleaning facility.
  3. If the property has a history of housing certain businesses or operations that could lead to contamination, such as a home-based auto repair shop, or if the property has an underground heating oil tank.
  4. If the property is part of a larger real estate transaction, such as a real estate investment portfolio, where the buyer or lender requires an ESA for all properties in the transaction.



That said, ESAs are less common in typical residential transactions due to the lower risk of environmental contamination, and also because the cost and time required for a Phase I or Phase II ESA can be significant. Most residential buyers rely on home inspections, which can sometimes identify potential environmental issues, like asbestos or lead-based paint in older homes.


Environmental Site Assessments: Understanding Phase I and Phase II


In the context of real estate transactions, a Phase I and Phase II environmental site assessment (ESA) are common steps taken to evaluate the environmental condition of a property. They serve different purposes and consist of different levels of investigation. Here's how they generally work:



Phase I Environmental Site Assessment (ESA): This is the first step in the environmental due diligence process. The purpose of a Phase I ESA is to identify potential or existing environmental contamination liabilities. It typically includes a review of records, a site inspection, and interviews with owners, occupants, neighbors and local government officials.

The assessment looks at both the current and historical use of the property and potentially neighboring properties to assess if there are or could have been activities that may have caused environmental contamination. This could include things like use of hazardous substances or petroleum products, storage tanks, spills or other chemical releases, etc.

The goal of a Phase I ESA is to identify recognized environmental conditions (RECs) that indicate the presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release, or a material threat of a release.
The Phase I ESA does not typically involve actual physical testing or sampling from the property.


Phase II Environmental Site Assessment (ESA): If a Phase I ESA identifies potential environmental contamination (recognized environmental conditions or RECs), a Phase II ESA may be conducted. The Phase II ESA is an "intrusive" investigation which collects original samples of soil, groundwater or building materials to analyze for quantitative values of various contaminants. This phase investigates the potential contaminants in order to understand the nature, extent, and concentration of contamination at the site.

This phase is more expensive and time consuming, but it provides a more detailed and quantitative analysis of the potential environmental liabilities associated with a site.

Both Phase I and Phase II ESAs are part of the environmental due diligence process in a real estate transaction. The reports can be used by buyers, sellers, or lenders to understand the environmental risks associated with a property, which can impact property value, liability, and potential future uses of the property. They also play an important role in maintaining compliance with environmental regulations and laws, such as the U.S. Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or "Superfund" law.

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