Phase 1 Environmental Site Assessment Guide

What Is a Phase 1 Environmental Site Assessment?

A Phase 1 Environmental Site Assessment (Phase 1 ESA) is a due diligence investigation that evaluates a commercial property for potential environmental contamination. It is the standard first step in environmental due diligence for any commercial real estate (CRE) transaction, required by nearly every lender before funding a loan.

The Phase 1 ESA does not involve physical testing of soil, water, or air. Instead, it relies on historical research, government records, site visits, and interviews to identify recognized environmental conditions (RECs) that could indicate contamination. The assessment follows the ASTM E1527-21 standard, which replaced the previous ASTM E1527-13 version in February 2024 for all new assessments.

For CRE investors, the Phase 1 ESA serves two critical purposes: it satisfies lender requirements for acquisition loans and bridge loans, and it establishes the "innocent landowner defense" under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Without this assessment, a buyer could inherit full liability for contamination cleanup costs that can reach millions of dollars. Speak with a loan advisor to learn how Phase 1 ESA requirements apply to your transaction.

Why Do Lenders Require a Phase 1 ESA Before Funding?

Commercial lenders require Phase 1 ESAs because environmental contamination directly threatens collateral value. If contamination is discovered after closing, cleanup costs can exceed the property value, leaving the lender with an impaired asset. Federal and state environmental laws can impose liability on current property owners regardless of who caused the contamination.

The key reasons lenders mandate Phase 1 ESAs include collateral protection, regulatory compliance, secondary market requirements, and risk management. Properties with unidentified contamination can lose 25% to 75% of their value once environmental issues surface. Lenders funding SBA loans face additional scrutiny from the Small Business Administration, which has strict environmental review requirements for all 7(a) and 504 loans.

Most lenders require the Phase 1 ESA to be completed within 180 days of the transaction closing date. Get pre-qualified today to understand the environmental due diligence requirements for your specific loan program. The report must name the lender as an authorized user, and many lenders require the environmental consultant to carry specific insurance minimums, typically $1 million in professional liability coverage.

What Does the ASTM E1527-21 Standard Include?

The ASTM E1527-21 standard defines four core components of a Phase 1 ESA: records review, site reconnaissance, interviews, and the final report. Each component follows specific protocols to ensure consistency and thoroughness across all assessments nationwide.

Records Review: The environmental professional (EP) researches federal, state, tribal, and local government databases for evidence of contamination on or near the subject property. Standard search distances range from the subject property boundary out to one mile, depending on the database type. Key databases include the EPA's National Priorities List (NPL), CERCLIS, RCRA facilities lists, state leaking underground storage tank (LUST) registries, and brownfield inventories.

Site Reconnaissance: The EP conducts a physical inspection of the property and adjoining properties to observe current conditions and identify visible signs of contamination. This includes looking for storage tanks, chemical containers, stained soil, stressed vegetation, floor drains, and other indicators of environmental concern.

Interviews: The EP interviews current and past property owners, occupants, operators, and local government officials to gather information about historical property uses and any known contamination incidents.

Report Preparation: The EP compiles all findings into a written report that identifies recognized environmental conditions, controlled recognized environmental conditions, historical recognized environmental conditions, and de minimis conditions. The report also includes data gaps and recommendations.

The 2021 update to the ASTM standard introduced several important changes from the previous 2013 version. These updates reflect evolving environmental concerns and regulatory developments that CRE investors should understand.

What Are Recognized Environmental Conditions (RECs)?

Recognized environmental conditions are the core findings of any Phase 1 ESA. A REC is defined as the presence or likely presence of hazardous substances or petroleum products in, on, or at a property due to a release to the environment, under conditions indicative of a release, or under conditions that pose a material threat of a future release. Understanding the three categories of RECs is essential for evaluating risk.

A REC (Recognized Environmental Condition) indicates an active or unresolved environmental concern that warrants further investigation, typically through a Phase 2 ESA. Examples include an active dry cleaning operation with no documentation of proper chemical handling, evidence of unreported underground storage tanks, or proximity to a known contaminated site with potential plume migration.

A CREC (Controlled Recognized Environmental Condition) refers to a past release that has been addressed but requires ongoing management through engineering or institutional controls. For instance, a property with a deed restriction limiting future use due to residual contamination in soil beneath an existing cap would be classified as a CREC.

An HREC (Historical Recognized Environmental Condition) indicates a past release that has been fully remediated with regulatory closure. No further investigation or action is required, though the condition is documented for transparency. An example is a former gas station site where all tanks were removed and contaminated soil was excavated, with the state issuing a No Further Action (NFA) letter.

Understanding these distinctions is critical when evaluating properties for purchase. A single REC does not necessarily kill a deal, but it does require careful analysis of potential costs and timelines. Review our commercial due diligence checklist for a complete framework on evaluating property risks alongside environmental findings.

What Happens During the Site Inspection Process?

The site inspection, also called site reconnaissance, is one of the most important components of a Phase 1 ESA. The environmental professional physically visits the property to observe conditions that may indicate past or current contamination. This visit typically takes two to eight hours depending on the property size and complexity.

During the inspection, the EP follows a systematic protocol examining both the interior and exterior of the property. Interior observations include flooring conditions, chemical storage areas, mechanical rooms, elevator pits, and any areas showing signs of spills or staining. Exterior observations cover drainage patterns, vegetation health, soil conditions, neighboring property uses, and the presence of monitoring wells, vent pipes, or fill ports that might indicate underground storage tanks.

The EP also examines adjoining properties from the subject property boundary and from public rights of way. This is important because contamination from neighboring sites can migrate onto the subject property through groundwater flow or vapor intrusion. Industrial facilities, gas stations, dry cleaners, and auto repair shops within the standard search radius receive particular attention.

Property access issues can create significant data gaps in the assessment. If areas of the property or neighboring properties cannot be inspected, the EP must document these limitations and evaluate whether they represent a significant data gap that affects the reliability of the assessment conclusions.

How Much Does a Phase 1 ESA Cost and How Long Does It Take?

Phase 1 ESA costs vary based on property size, complexity, location, and the environmental consultant's qualifications. For standard commercial properties, investors should budget between $2,000 and $6,000. Larger or more complex properties, such as industrial sites, properties with long operational histories, or multi-parcel acquisitions, can cost $6,000 to $15,000 or more.

The typical timeline from engagement to final report delivery is 3 to 5 weeks. Government database searches account for much of this timeline, as some agencies take 2 to 3 weeks to respond to records requests. Expedited turnaround of 10 to 15 business days is available from many firms for an additional fee of $500 to $2,000.

Several factors influence both cost and timeline. Rural properties may require additional research to identify historical uses, while urban properties often have more extensive regulatory records to review. Properties with multiple buildings, large acreage, or complex industrial histories require more inspection time and deeper records analysis. Sites located in states with more comprehensive environmental databases, such as California, New Jersey, and Massachusetts, often require additional review time due to the volume of records available.

When budgeting for your transaction, use our commercial mortgage calculator to factor environmental due diligence costs into your total acquisition budget. The Phase 1 ESA is just one component of the broader due diligence process that also includes the commercial appraisal. These costs are typically paid by the borrower at the time of engagement and are non-refundable.

When Is a Phase 2 Environmental Site Assessment Needed?

A Phase 2 ESA is triggered when the Phase 1 assessment identifies one or more recognized environmental conditions (RECs) that require further investigation. Unlike the Phase 1, a Phase 2 involves physical sampling and laboratory analysis of soil, groundwater, soil vapor, or building materials to confirm or rule out contamination.

The decision to proceed to Phase 2 depends on several factors: the nature and severity of identified RECs, the intended property use, lender requirements, and the buyer's risk tolerance. Some lenders automatically require Phase 2 investigation for any identified REC, while others evaluate the findings on a case-by-case basis.

Phase 2 ESA costs range from $10,000 to $75,000 or more depending on the scope of investigation required. Timelines typically run 4 to 8 weeks for sampling and analysis, with additional time needed if contamination is confirmed and a remediation plan must be developed. For properties requiring environmental cleanup, bridge loan financing can provide the flexibility needed to fund remediation while the property is stabilized.

If you are considering a property with known environmental issues, our guide on brownfield redevelopment financing covers the loan programs and incentives available for contaminated site projects.

How Does a Phase 1 ESA Protect You Under CERCLA?

CERCLA, commonly known as Superfund, imposes strict, joint, and several liability on four categories of parties: current owners, past owners at the time of disposal, generators of hazardous substances, and transporters. This means a current property owner can be held liable for the full cost of environmental cleanup even if they did not cause or contribute to the contamination.

The "innocent landowner defense" under CERCLA provides protection for buyers who conduct "all appropriate inquiries" (AAI) before purchasing a property. A Phase 1 ESA conducted under the ASTM E1527-21 standard satisfies the AAI requirement. To maintain this defense, the buyer must also demonstrate that they did not know and had no reason to know of contamination at the time of purchase.

Three specific CERCLA defenses are available to property purchasers who complete a qualifying Phase 1 ESA. The "innocent landowner defense" applies when the buyer had no knowledge of contamination and conducted all appropriate inquiries. The "bona fide prospective purchaser" defense protects buyers who knew about contamination before purchase but took appropriate steps, including completing a Phase 1 ESA. The "contiguous property owner" defense applies when contamination migrated from an adjacent property.

To preserve these defenses, property owners must also exercise appropriate care after acquisition, cooperate with any government response actions, and comply with institutional controls or land use restrictions. Failure to meet these ongoing obligations can void the liability protection even if the original Phase 1 ESA was properly conducted.

What Should CRE Investors Look for When Hiring an Environmental Consultant?

Selecting the right environmental consultant is critical to obtaining a reliable Phase 1 ESA that will satisfy lender requirements and provide legitimate liability protection. Not all environmental firms deliver the same quality of work, and a poorly conducted assessment can leave investors exposed to both financial and legal risk.

The environmental professional (EP) who signs the report must meet specific qualifications under ASTM E1527-21. They must hold a current professional engineer (PE) or professional geologist (PG) license, or possess equivalent education and experience in environmental assessment. The EP takes personal responsibility for the conclusions in the report.

When evaluating firms, request sample reports, verify insurance coverage, confirm their familiarity with local regulatory databases, and check references from commercial lenders in your market. The cheapest option is rarely the best value. A thorough assessment that identifies issues early can save hundreds of thousands of dollars compared to discovering contamination after closing.

Ready to move forward with your commercial acquisition? Contact our team to discuss how environmental due diligence fits into your financing timeline. Our loan officers work closely with borrowers to coordinate Phase 1 ESA scheduling with loan processing milestones.

What Are the Most Common Questions About Phase 1 ESAs?

How long is a Phase 1 ESA valid? Under ASTM E1527-21, a Phase 1 ESA is valid for one year from the date of the report. However, certain components have shorter shelf lives. The site inspection, interviews, and government records search must be updated if they are more than 180 days old at the time of the transaction. Most lenders prefer reports completed within 6 months of closing.

Can I use a Phase 1 ESA from a previous owner? Generally, no. Most lenders require a new Phase 1 ESA with the current buyer and lender listed as authorized users. Some firms offer "reliance letters" that extend report reliance to additional parties, but these are not universally accepted by lenders and do not substitute for a current assessment.

Does a Phase 1 ESA test for asbestos, lead paint, or mold? No. A standard Phase 1 ESA does not include testing for asbestos-containing materials (ACM), lead-based paint (LBP), radon, or mold. These are considered "non-scope" items under ASTM E1527-21. However, the EP may note observed conditions related to these materials during the site inspection. Separate assessments for these hazards can be added to the scope of work for additional fees.

Who pays for the Phase 1 ESA? The borrower or property buyer typically pays for the Phase 1 ESA. This cost is part of the transaction's due diligence expenses and is generally non-refundable. In some cases, the cost may be negotiated as part of the purchase agreement, with the seller covering all or part of the assessment fee.

What happens if the Phase 1 ESA finds contamination? If the Phase 1 ESA identifies a REC, the lender will typically require a Phase 2 ESA before proceeding with the loan. Depending on the Phase 2 findings, the deal may proceed with risk-based pricing, require remediation before closing, or the lender may decline the loan. Buyers can also renegotiate the purchase price or request environmental escrows.

Can I skip the Phase 1 ESA if the property is brand new construction? No. Even newly constructed properties require a Phase 1 ESA because the assessment evaluates the history of the land, not just the current building. The site may have been used for agricultural purposes with pesticide applications, or it could be located near contaminated properties with migrating plumes. Lenders require Phase 1 ESAs regardless of building age.

What is the difference between Phase 1 and Phase 2 ESA? A Phase 1 ESA is a non-invasive historical and records-based investigation that identifies potential contamination risks. A Phase 2 ESA involves physical sampling (soil borings, groundwater monitoring wells, soil vapor probes) and laboratory analysis to confirm whether contamination actually exists and at what concentrations. Phase 1 costs $2,000 to $6,000, while Phase 2 costs $10,000 to $75,000 or more.

Does a clean Phase 1 ESA guarantee there is no contamination? No. A Phase 1 ESA provides professional opinions based on available information, historical records, and observable conditions. It does not guarantee the absence of contamination. Data gaps, incomplete records, or conditions not visible during the inspection could mean contamination exists but was not identified. However, a properly conducted Phase 1 ESA significantly reduces the risk of encountering unexpected environmental issues.

Where Can You Find More Information on Phase 1 ESAs?

1. ASTM International. "ASTM E1527-21: Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process." ASTM International, 2021. astm.org

2. U.S. Environmental Protection Agency. "All Appropriate Inquiries Rule." 40 CFR Part 312. epa.gov

3. U.S. Environmental Protection Agency. "CERCLA and Superfund: Overview." epa.gov

4. Small Business Administration. "Environmental Reviews for SBA 7(a) and 504 Loans." SOP 50 10 7.1. sba.gov