When Does a Phase I ESA Lead to a Phase II ESA?
One of the most common questions asked during environmental due diligence is whether a Phase I Environmental Site Assessment (Phase I ESA) will lead to additional investigation. While many commercial properties successfully complete the Phase I ESA process without further environmental evaluation, certain findings may warrant a Phase II Environmental Site Assessment (Phase II ESA).
Understanding when a Phase I ESA leads to a Phase II ESA can help lenders, developers, investors, attorneys, commercial real estate professionals, and property owners better evaluate environmental risk and make informed transaction decisions.
A Phase II ESA is not automatically required because a Phase I ESA has been completed. Rather, it is typically recommended when the Phase I ESA identifies information suggesting the potential presence of environmental contamination.
A Phase II may also be recommended when the Phase I has a major uncertainty, not only a clear REC. For example: missing historical records, inaccessible areas, unverified tank closure, or unclear prior operations.
Understanding the Relationship Between Phase I and Phase II ESAs
A Phase I Environmental Site Assessment is designed to identify potential environmental concerns associated with a property through records research, site reconnaissance, regulatory review, and interviews.
The Phase I ESA does not include:
Soil sampling
Groundwater testing
Laboratory analysis
Environmental media collection
Instead, it evaluates whether sufficient evidence exists to suggest environmental risk.
A Phase II ESA serves a different purpose. It is an intrusive investigation that collects environmental samples to determine whether contamination is actually present and, if so, to evaluate its extent.
The Phase I ESA identifies potential concerns.
The Phase II ESA investigates those concerns.
The Most Common Trigger: Recognized Environmental Conditions (RECs)
The most common reason a Phase I ESA leads to a Phase II ESA is the identification of a Recognized Environmental Condition (REC) during the Phase I ESA.
Under ASTM E1527-21, a REC generally refers to:
The presence or likely presence of hazardous substances or petroleum products in, on, or at a property due to a release, likely release, or material threat of a release.
Not all RECs require a Phase II ESA. However, many REC findings warrant additional investigation to better understand environmental conditions at the property.
Related Resource:
What Are Recognized Environmental Conditions (RECs)?
Does a REC Automatically Require a Phase II ESA?
No. One of the most common misconceptions in environmental due diligence is that every REC automatically results in a Phase II ESA.
Environmental consultants evaluate:
Available documentation
Regulatory history
Site conditions
Historical uses
Closure records
Risk significance
In some cases, sufficient documentation exists to demonstrate that environmental concerns have been adequately addressed. In other situations, uncertainty remains, making additional investigation appropriate.
The recommendation for a Phase II ESA is ultimately based on professional judgment, site-specific conditions, and the objectives of the transaction.
How Lenders Influence Phase II Decisions
Lenders often play an important role in determining whether additional investigation is necessary.
When a REC is identified, lenders may request:
Additional environmental documentation
Regulatory closure records
Environmental sampling
Phase II ESA investigations
Financial institutions use environmental due diligence to better understand potential liabilities associated with collateral properties. While lender requirements vary, many institutions prefer additional investigation when significant environmental uncertainty exists.
What Happens During a Phase II ESA?
A Phase II Environmental Site Assessment is designed to evaluate whether contamination is present.
Depending on site conditions, a Phase II ESA may include:
Soil Sampling
Environmental professionals collect soil samples from targeted areas identified during the Phase I ESA.
Groundwater Sampling
Monitoring wells may be installed to evaluate groundwater quality.
Vapor Intrusion Evaluation
In certain situations, environmental consultants may assess whether volatile contaminants could migrate into indoor environments.
Laboratory Analysis
Samples are submitted to certified laboratories for chemical analysis.
The analytical program depends on the contaminants of concern identified during the Phase I ESA process.
What If Contamination Is Found?
The presence of contamination does not necessarily prevent a transaction from moving forward.
Depending on the findings, potential outcomes may include:
No additional action required
Limited corrective measures
Environmental remediation
Regulatory coordination
Risk management strategies
Transaction modifications
Many commercial real estate transactions successfully close despite environmental concerns, provided those concerns are properly understood and managed.
A Phase I Environmental Site Assessment does not automatically lead to a Phase II ESA. However, when environmental professionals identify Recognized Environmental Conditions, historical site activities, or other indicators of potential contamination, additional investigation may be recommended.
Phase II Environmental Site Assessments provide the data necessary to determine whether contamination exists and help lenders, developers, investors, attorneys, and property owners make informed decisions regarding environmental risk.
Understanding the relationship between Phase I and Phase II ESAs is a critical component of environmental due diligence and can help support successful commercial real estate transactions, redevelopment projects, and lending decisions.