Is your Phase 1 Good Enough?

Posted on May 12th, 2015

NJ may be a great place to live for a variety of reasons however, we are also known for our long industrial history and large number of contaminated sites, many of which have not yet been identified, investigated, or remediated. When considering the purchase of real property in the state of NJ, knowing the history of the site and the environmental risks associated with it is not only important from a health and financial standpoint, it is almost universally required by lending institutions when purchasing or refinancing. The requirement to complete a Phase 1 is often looked at as a box to be checked to satisfy the bank. However, it can be much more than that. A Phase 1 can also provide documentation that you are not responsible for any issues that are present or may be identified at a later date. To qualify for Innocent Purchaser Defense you must be able to prove that you purchased a site after a discharge or that you had no reason to know that a discharge has occurred. A properly conducted Phase 1, which includes all appropriate inquiry, is the basis of this defense. In NJ, after 1993, your assessment must also comply with the criteria to complete a NJDEP Preliminary Assessment.

What are some of the differences between a Phase 1 and a PA?

Both assessments require a review of current and historic site operations.

A Phase 1 requires that you qualitatively assess any historic recognized environmental conditions (RECs) that have been remediated to the satisfaction of a regulatory agency. However, a PA requires that you additionally review all available data for that REC, and compare the data to current standards. The intent of this quantitative assessment is to determine whether the historic closure of the AOC is still protective or if additional investigation may be needed.

A Phase 1 requires only that you make a reasonable attempt to review “readily available” site information, where the definition of readily available is “available for review within 20 days and not for a prohibitive cost”. If data is not available for review, the environmental professional (EP) must assess the resulting effect on their conclusions. Information that will not be available for a long period of time can be noted as a data gap, and the Phase 1 process can be completed in approximately 30 days. The PA requirement to review all available data (even if it is time consuming or costly to acquire), can add significant time needed to conduct a complete and defensible assessment. It can take months to acquire NJDEP files and EPA has, in extreme cases, been known to take years. If it is reasonable to expect that there is existing relevant data and you close your due diligence without a review of this information, you may not be protected from an innocent purchaser standpoint.

Real estate can be a risky business. As a prospective purchaser, you need your consultant to provide you with a complete and accurate assessment. You need an environmental professional who has the experience and ethics to conduct a complete and defensible assessment; someone who understands NJ regulations.

The cost to complete a sufficient due diligence assessment that offers sufficient liability protection differs for each property based on the size of the site, complexity of site history, the nature of past operations, volume of available historic documents, and the quality of prior reviews, as well as your (and your lender’s) risk tolerance.

Alison Kokorsky

Project Manager, JM Sorge, Inc.

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