Anyone buying, financing, or leasing commercial or industrial property in California will eventually hear the words Phase I. It is often treated as a box to check before closing, and then a finding surfaces that delays the deal or changes the price. A Phase I Environmental Site Assessment is not a formality. It is the mechanism by which a buyer or lender establishes that they investigated the property before taking title, which is what protects them from cleanup liability for contamination they did not cause. This article explains when a Phase I is needed, what the current standard requires, and what happens when the findings call for a Phase II.
Why a Phase I Exists
Under the federal Superfund law, CERCLA, an owner or operator of contaminated property can be held liable for cleanup regardless of who caused the contamination. California’s Hazardous Substance Account Act imposes similar liability at the state level. The defenses available to a purchaser, including the innocent landowner, bona fide prospective purchaser, and contiguous property owner defenses, all depend on having conducted all appropriate inquiries before acquiring the property.
The U.S. EPA has defined all appropriate inquiries by rule, and the rule recognizes ASTM Standard E1527 as satisfying it. The current version is E1527-21, which EPA formally recognized in 2022 and which replaced the 2013 edition. A Phase I performed to an outdated standard, or performed more than a year before closing without updates, may not preserve the defense.
When a Buyer or Lender Needs One
There is no statute that says every transaction requires a Phase I. The requirement comes from three sources: the liability defenses described above, lender policy, and contractual due diligence provisions. In practice, expect to need a Phase I when:
- Purchasing any commercial, industrial, agricultural, or multifamily property, particularly one with a history of manufacturing, fueling, dry cleaning, auto repair, printing, or agricultural chemical use
- Obtaining a commercial loan. Most institutional lenders and all SBA 504 and 7(a) loans over certain thresholds require a Phase I, and SBA has its own environmental policy that references the ASTM standard
- Taking a ground lease or long-term lease where the tenant will hold operator status
- Acquiring property through foreclosure or as a receiver
- Purchasing vacant land in a formerly industrial or agricultural area, or any parcel where fill material may have been imported
What a Phase I Covers Under ASTM E1527-21
A Phase I is a non-intrusive investigation. Nothing is drilled, sampled, or analyzed in a laboratory. The work is done by an environmental professional who meets the qualifications in the EPA rule and consists of four components:
Records review. The environmental professional searches federal, state, tribal, and local databases for the site and surrounding properties within specified search distances. In California that includes Department of Toxic Substances Control and State Water Resources Control Board records, the GeoTracker and EnviroStor databases, county environmental health files, fire department hazardous materials records, and local building and planning files. Historical sources, including aerial photographs, fire insurance maps, city directories, and topographic maps, are reviewed back to the property’s first developed use or 1940, whichever is earlier.
Site reconnaissance. The environmental professional walks the property and observes the interior and exterior for evidence of current or past hazardous substance or petroleum use: stained soil or pavement, stressed vegetation, drums, above-ground and underground storage tanks, sumps, floor drains, pits, transformers, vent pipes, fill ports, monitoring wells, and unexplained fill. Adjoining properties are viewed from the boundary or public right of way.
Interviews. The current owner, key site manager, occupants, and where appropriate past owners and local government officials are interviewed about the property’s history and known conditions. The user of the report, meaning the buyer or lender, has obligations too, including a search for environmental liens and activity and use limitations, and disclosure of any specialized knowledge they hold.
The report. The findings are documented in a written report that identifies Recognized Environmental Conditions, or RECs, along with the newer categories that E1527-21 sharpened: Controlled RECs, which are past releases addressed to regulatory closure but subject to ongoing controls, and Historical RECs, which are past releases closed without restrictions. The 2021 standard also added a requirement to discuss emerging contaminants such as PFAS as a non-scope consideration and tightened the definition of what counts as a significant data gap.
What a Phase I Does Not Cover
Several conditions are outside the scope of a standard Phase I unless added by agreement. Asbestos-containing materials, lead-based paint, radon, mold, wetlands, endangered species, and regulatory compliance audits are all non-scope items. A buyer of an older building who wants those evaluated needs to ask for them specifically. A Phase I also cannot tell you what is in the soil or groundwater. It tells you whether there is reason to believe something may be there.
When a Phase I Triggers a Phase II
A Phase I that identifies one or more RECs does not, by itself, require any further action. It is the buyer’s and lender’s decision what to do with the information. In practice, the following findings almost always lead to a recommendation for Phase II subsurface investigation:
- A documented but unresolved release on the site or an adjoining upgradient site
- Evidence of current or former underground storage tanks without closure documentation
- A former dry cleaner, plating shop, or auto repair use with no record of investigation
- Staining, odors, or distressed vegetation observed during reconnaissance that cannot be explained
- Historical agricultural use where pesticide residues in shallow soil are a concern for residential redevelopment
A Phase II is an intrusive investigation. It typically involves soil borings, soil vapor probes, and groundwater sampling at locations chosen to test the specific REC identified in the Phase I, with laboratory analysis for the contaminants of concern. The scope should be targeted. A Phase II that samples everywhere for everything wastes money and often produces ambiguous results. The purpose is to answer the question the Phase I raised: is there contamination, at what concentration, and does it exceed the screening levels that apply to the intended use?
Timing and Shelf Life
A Phase I must be completed within 180 days before acquisition to satisfy all appropriate inquiries, and certain components, including the records search, interviews, lien search, and site visit, must have been performed within that window. A report older than 180 days but less than a year old can be updated. A report over a year old must be redone.
What to Do Now
- Build the Phase I into your purchase agreement timeline. Allow three to four weeks for a standard property and longer if a Phase II is likely.
- Engage an environmental professional who meets the EPA qualifications and who will perform the work to E1527-21, not an earlier edition.
- Complete the user questionnaire honestly and run the environmental lien search early. A missing user component can undermine the defense.
- Ask for non-scope items such as asbestos, lead paint, and mold if the building age or intended use warrants them.
- If a Phase II is recommended, insist on a targeted scope with a clear question, and involve your attorney before any results are sent to a regulatory agency.
McNeil Safety Consulting performs Phase I Environmental Site Assessments to ASTM E1527-21 for buyers, lenders, and attorneys throughout California, coordinates Phase II investigations when findings require them, and explains the results in terms a deal team can act on. Learn more about our environmental assessment services or call (626) 546-9384 to discuss your transaction.