Phase I Environmental Site Assessments: A Comprehensive Guide for Developers and Lenders

3 Star Industrial Land

Environmental due diligence is a critical part of modern real estate transactions. In the United States, the cornerstone of this due diligence is often the Phase I Environmental Site Assessment (ESA). This article provides an in-depth look at Phase I ESAs – what they are, why they’re conducted, who needs them, how they’re performed, the standards and terminology involved, and their limitations. Written in an accessible style for real estate developers and lenders, this guide also includes practical insights from a real Phase I ESA on a Texas commercial hospitality site (anonymized for confidentiality).

What Is a Phase I Environmental Site Assessment?

A Phase I Environmental Site Assessment is a preliminary investigation of a property’s environmental conditions and history. Its primary purpose is to determine whether past or present activities have contaminated the site with hazardous substances or petroleum products, creating potential liability or risks to human health. In essence, a Phase I ESA involves researching the current and historical uses of the property (and nearby properties) and assessing if those uses may have impacted soil, groundwater, or air with pollution. Importantly, a Phase I ESA is a non-intrusive study – it includes no soil or water sampling, only review of records and a visual inspection. The outcome is an expert report evaluating whether any Recognized Environmental Conditions (RECs) – indications of releases or potential releases of hazardous substances – are present.

Phase I ESAs are typically conducted as part of a commercial real estate transaction, before purchase or financing closes. The intent is to identify environmental issues that could pose a threat to the environment or human health and become a financial or legal liability for owners or lenders. For example, if a Phase I ESA finds evidence of a leaking underground tank or industrial dumping on the property, it signals a potential contamination problem that could cost thousands or even millions of dollars to clean up – a serious concern for any buyer or lender. By uncovering such issues early, the Phase I ESA allows parties to make informed decisions: renegotiate the deal, require cleanup by the seller, or avoid the transaction altogether. In this way, a Phase I ESA is both a risk management tool and a prerequisite for certain legal protections (discussed more below). In short, it is the first line of defense against “hidden” environmental problems in real estate.

Why Are Phase I ESAs Conducted?

The main drivers for conducting a Phase I ESA are risk management, regulatory compliance, and transactional prudence:

• Preventing Environmental Liability: Under U.S. law – notably the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, or “Superfund”) – property owners can be held strictly liable for cleanup of hazardous substances on their property, even if they did not cause the contamination. This means a developer who unknowingly buys a polluted site could be forced to pay for an expensive cleanup years later. A Phase I ESA helps manage this risk by identifying potential contamination before acquisition. If contamination is found, the buyer can avoid taking on the liability or ensure it’s addressed. If no issues are found, the buyer gains confidence that they aren’t inheriting someone else’s pollution problem. Skipping environmental due diligence can be disastrous – imagine purchasing a property only to later discover an old leaking fuel tank underground; the new owner would be responsible for the cleanup costs and regulatory headaches. Conducting a Phase I ESA prior to purchase vastly reduces the chance of such unpleasant surprises.

• CERCLA Liability Protection: Beyond prudent risk management, Phase I ESAs are performed to satisfy the legal requirements for certain liability defenses under CERCLA. In 2002, Congress established that purchasers of property could avoid Superfund liability as “innocent landowners,” “bona fide prospective purchasers,” or “contiguous property owners,” but only if they conduct “all appropriate inquiries” into the property’s environmental condition before buying. A properly executed Phase I ESA (following the accepted standards) is the recognized way to perform these All Appropriate Inquiries (AAI). In practical terms, completing a Phase I ESA prior to closing on a deal is a key step to qualify for CERCLA’s innocent landowner defense. It demonstrates that the buyer made diligent efforts to check for contamination. Failing to do a Phase I means forfeiting this legal protection. Developers who plan to redevelop brownfield sites (properties with potential pollution) especially rely on Phase I ESAs to help secure liability protections and sometimes eligibility for cleanup grants.

• Transaction Requirements and Risk Allocation: In commercial real estate transactions, it has become standard practice – and often a contractual requirement – to perform a Phase I ESA during the due diligence period. From a lender’s perspective, a Phase I ESA is essential to protect the loan’s collateral value. Banks and other lending institutions carefully scrutinize environmental risks before approving loans. In fact, lenders typically require a clean Phase I ESA report (showing no serious issues) as a condition for financing. This is because environmental problems can dramatically reduce property value and even impose direct liability or foreclosure difficulties on the lender. One industry study found that small banks suffered a large portion of loan losses due to environmental problems, which is why they are stringent about environmental due diligence. From the buyer or developer’s perspective, a Phase I ESA is equally important. Investors use these assessments to ensure they’re not overpaying for a property that comes with hidden cleanup costs, and to avoid deals that could become money pits or legal quagmires. In negotiations, the findings of a Phase I can shift risk: if issues are found, buyers can insist the seller address them or adjust the price accordingly. Finally, in some cases regulatory triggers make Phase I ESAs necessary (for example, government redevelopment programs or certain building permits may demand proof of due diligence). But even when not explicitly required by law, Phase I ESAs are conducted in virtually all significant real estate deals as a matter of best practice in 2025 – they are “vital protection against hidden environmental problems” in property transactions.

Who Needs or Requires a Phase I ESA?

Several parties in a real estate deal have a stake in ensuring a Phase I ESA is completed:

• Lenders: As noted, lenders almost universally require a Phase I ESA for commercial property loans. Banks want to avoid financing a contaminated property, which could become essentially worthless or encumbered by cleanup liens. By requiring an ESA, the lender ensures there are no known environmental deal-breakers and that the borrower can qualify for the above-mentioned CERCLA defenses (thus reducing the risk that the borrower or property will be tied up in a Superfund action). Simply put, lenders use Phase I ESAs to protect their collateral and reduce the chance of default due to environmental costs. Many loan agreements include environmental provisions, and some lending programs (like SBA or HUD loans, or Fannie Mae/Freddie Mac for multifamily housing) have formal environmental review requirements that start with a Phase I. If you approach a bank for a commercial real estate loan, expect them to ask for a Phase I ESA report – deals won’t close without it.

• Property Buyers/Developers: Any prudent buyer of commercial or industrial real estate will commission a Phase I ESA as part of their due diligence, even if they are paying cash (no lender). As the party who would assume ownership (and thus potential liability), the buyer has the most to lose if a site is contaminated. Sophisticated investors and developers know that an upfront ~$2,000–$3,000 Phase I ESA can save them from catastrophic costs later. For example, a developer planning to build a new apartment complex needs to be sure there isn’t an old solvent plume underground from a former dry-cleaning operation – finding out after purchase could derail the project. In many cases, buyers include environmental review contingencies in purchase contracts, allowing them to back out or renegotiate if the Phase I uncovers a Recognized Environmental Condition. In short, developers, investors, and corporate real estate buyers require Phase I ESAs to make informed investment decisions and to avoid inheriting environmental problems. EPA’s rules explicitly state that any commercial or non-residential property purchaser who wants CERCLA liability protection must conduct All Appropriate Inquiries (which is typically a Phase I ESA). Even aside from legal protection, it’s just sound business practice – Phase I ESAs have become “crucial in real estate deals” and savvy investors in 2025 “can’t skip these assessments”.

• Sellers (occasionally): Usually the buyer arranges the Phase I, but sometimes property owners preemptively perform a Phase I ESA before listing a property for sale. This can be wise if the owner suspects an issue – identifying it and possibly remediating it can make the property more marketable. Also, in transactions involving certain government programs (e.g., brownfield grants or insurance), the seller might need to provide an environmental assessment. However, in most cases the impetus comes from the buyer or lender side, with the seller simply granting access for site inspections and providing any known environmental information.

In summary, anyone involved in transferring or financing commercial real estate – buyers, lenders, and often their attorneys or insurers – needs a Phase I ESA done. It is considered a standard checklist item in U.S. property transactions today, much like title insurance or an appraisal.

Who Conducts Phase I ESAs?

Phase I Environmental Site Assessments are performed by qualified environmental professionals, typically environmental consulting firms. The person in charge of the assessment (the “Environmental Professional” or EP) must meet specific credentials defined by the EPA’s All Appropriate Inquiries rule. According to federal regulations, an Environmental Professional is someone with sufficient education, training, and experience in environmental science or engineering to exercise professional judgment regarding environmental conditions on a property. In practice, this means the assessor often has a science or engineering degree (e.g. geology, environmental science, civil engineering) plus several years of relevant experience. Certain licenses or certifications (like Professional Geologist or Engineer) combined with experience can also qualify a person as an EP. For example, an EP might be a geologist with 5+ years of site investigation experience, or an engineer who has dealt with remediation projects for a decade.

The EP’s qualifications and declaration are usually stated in the Phase I ESA report. In our Texas hospitality site case, the consultants explicitly stated that they meet the EPA’s definition of Environmental Professional per 40 CFR §312.10 (the AAI rule) and have the required training and experience. They also affirm that the work was done in conformance with the AAI standards. This gives reliance to the report. Lenders and other users of the report will look for the EP’s signature and qualification statement to ensure the assessment is valid.

Importantly, the environmental professional should be independent and impartial. Phase I ESAs are often paid for by the buyer or lender, but the consultant’s role is to provide an objective assessment of conditions – not to please any party. Reputable consultants will note any limitations and will not downplay serious issues, since doing so could expose them to liability and harm their professional credibility. In the Phase I industry, firms carry environmental liability insurance and adhere to professional standards of care.

The EP is responsible for planning and executing the Phase I ESA according to the standard practice, which involves coordinating records searches, performing the site inspection, interviewing relevant people, and finally analyzing the information to produce conclusions. Larger consulting firms have teams (research specialists, field inspectors, etc.), but a qualified EP will oversee the process and sign off on the final report. In sum, Phase I ESAs are conducted by experienced environmental consultants who are credentialed to recognize potential contamination and knowledgeable about environmental regulations. Real estate stakeholders should always ensure their Phase I is performed by a properly qualified professional – this is not a do-it-yourself task or something for a general home inspector.

What Standards Apply to Phase I ESAs?

Phase I ESAs are performed according to a nationally recognized standard to ensure consistency and completeness. The current standard is ASTM E1527-21, Standard Practice for Environmental Site Assessments: Phase I ESA Process. This standard, issued by ASTM International, outlines the required scope of work and definitions for Phase I ESAs. Following ASTM E1527-21 is crucial because the EPA has endorsed it as compliant with the federal All Appropriate Inquiries rule. As of February 13, 2024, ASTM E1527-21 is officially the required standard for conducting Phase I ESAs to obtain CERCLA liability protections; the older 2013 version (ASTM E1527-13) is no longer sufficient for new inquiries. In other words, if you want to be safe under CERCLA’s innocent landowner defense or bona fide prospective purchaser provision, your Phase I must meet the E1527-21 standard as of 2024.

The ASTM E1527 standard is periodically updated (roughly every 8 years) to reflect industry best practices and regulatory changes. The 2021 revision (E1527-21) introduced clarifications and enhancements over the prior 2013 version. For instance, it tightened the definitions of REC, CREC, and HREC (more on those shortly) and requires more thorough historical research in some cases. It also includes an expanded focus on emerging contaminants: although substances like per- and polyfluoroalkyl substances (PFAS) were not federally regulated as hazardous substances at the time the standard was written, ASTM E1527-21 encourages evaluating Business Environmental Risks which can include emerging contaminants or other non-scope issues (this is addressed in an appendix of the standard). In 2024, PFAS chemicals were designated hazardous substances under CERCLA, meaning Phase I ESAs going forward may need to consider them more directly – an example of how standards and regulations are evolving.

Another relevant standard is ASTM E2247 (most recently E2247-23), which is an alternative Phase I ESA standard tailored for large, rural, or forestland properties. However, for typical commercial real estate parcels, E1527-21 is the applicable guide. The EPA’s AAI rule explicitly recognizes compliance with ASTM E1527-21 (or the identical requirements codified in 40 CFR Part 312) as meeting the all appropriate inquiries requirement. Thus, a Phase I ESA report will usually state that it was done in accordance with ASTM E1527-21 and 40 CFR 312. In our example Phase I (the Texas hospitality property), the consulting firm noted that “this Phase I ESA was performed in conformance with the scope and limitations of ASTM Standard E1527-21”, with any deviations listed in the report (in that case, no significant deviations were noted).

In practical terms, adherence to the ASTM standard means the Phase I ESA will contain certain key components (records review, site inspection, interviews, etc.) and the report will document the findings in a consistent manner, including conclusions about RECs. It also means the report will include specific certifications by the environmental professional and required language (for example, stating that no warranties are made, the work was done per the standard, etc.). For developers and lenders, using the ASTM-compliant process is important not just for legal reasons but also because it gives a common framework – an ASTM Phase I report from one consultant should cover roughly the same bases as that from another consultant, allowing easier review and understanding.

To summarize, ASTM E1527-21 is the guiding standard for Phase I ESAs, and it is directly tied to CERCLA liability protections. Always ensure your Phase I ESA is ASTM-compliant. Using an outdated or non-standard approach could invalidate the “due diligence” in the eyes of regulators and lenders, defeating the purpose of the assessment.

What Does the Phase I ESA Process Include?

A standard Phase I ESA entails four primary components: records review, site reconnaissance, interviews, and reporting. We’ll break each down:

• 1. Records Review: The environmental professional gathers and reviews a variety of documents and databases to understand the site’s history and any recorded environmental issues. This includes:

  • Environmental regulatory databases: Comprehensive search reports (often purchased from services like ERIS or EDR) are reviewed to see if the site or nearby properties are listed on federal or state databases of contaminated sites, underground storage tank registrations, spills, landfills, hazardous waste generators, cleanups, etc. For example, the assessor will check if the address appears on EPA’s CERCLA/Superfund list, state leaking underground storage tank lists, Brownfield inventories, RCRA hazardous waste site lists, and so on. In the Texas hospitality property case, the consultant obtained a regulatory database report for the site and a surrounding radius; notably, the subject property was not identified in any of the databases searched (no recorded environmental incidents at that address). Some nearby facilities were listed (including a couple of old leaking tank cases within about a quarter mile), but upon review the consultant determined those off-site incidents were either too far, down-gradient, or cleaned up such that they posed no threat to the subject property.

  • Historical use records: The assessor will research how the property was used or developed in the past, because prior activities (especially industrial or commercial uses) could have caused contamination. Common historical sources include aerial photographs (examining decades of aerial images for signs of past buildings, tanks, orchards, etc.), city directories (old phone books/business directories that list what businesses operated at the address over time), fire insurance maps (Sanborn maps) which show detailed facility layouts and uses in the past, historical topographic maps, and sometimes property tax files, building permits, or land title records. For the motel property in Texas, historical research showed that the site was undeveloped land for many years prior to the 1980s. The motel was constructed in the mid-1980s and has operated as lodging (Motel/Studio 6) since then. The Phase I ESA included a review of aerial photos and city directories back to the early 20th century – no evidence of gas stations, dry cleaners, industrial plants or other high-risk usage was found at that location in the past, which is a good sign. The only noteworthy historical item was that the site lies along a highway (Interstate 37), and historically the surrounding area had some industrial facilities and truck service businesses. The environmental professional checked those nearby sites in historical sources and regulatory records to ensure they did not impact the motel property (and concluded they did not, as no migration issues were suspected).

  • Physical setting sources: Phase I ESAs also consider the natural setting – for instance, geology, hydrogeology, and floodplain data – largely to understand how contamination, if present, might travel. USGS topo maps or soil surveys might be consulted. In our example, the site is relatively flat coastal plain geology in Corpus Christi, and groundwater (if contaminated elsewhere) would likely flow eastward. Such info can help determine if an off-site spill up-gradient might reach the site.

  • Previous environmental reports: If any prior environmental investigations or Phase I/II reports on the property are available, those are reviewed as well.

• 2. Site Reconnaissance (Site Visit): The environmental professional (or team) conducts a thorough visual inspection of the site and surrounding properties. They walk the property looking for any signs of current or past hazardous material use or releases. This includes observing:

  • Any storage tanks (above-ground tanks on site, or vents/fill pipes that indicate underground storage tanks),

  • Evidence of spills or stains on soil or pavement, distressed vegetation (which can indicate chemical exposure),

  • Storage or disposal of chemicals and wastes (drums, containers, dumpsters) and whether any leaks or improper storage are evident,

  • Condition of structures (for instance, staining on floors, sumps, or drains that might indicate past chemical use),

  • Presence of transformers or electrical equipment that might contain PCBs,

  • Any pits, ponds, or lagoons,

  • Any obvious vapor or chemical odors, etc.

  
  

  The inspector also notes current operations: for example, are there any automotive service activities, painting, or industrial processes happening on site? In the case of the Texas hospitality property, the site visit observed typical hotel conditions: guest rooms, a parking lot, a swimming pool, and maintenance areas. No evidence of underground or aboveground storage tanks was found (no fuel pumps, no fill caps in the pavement, and no records of any being installed). The only storage observed was a dumpster for solid waste and perhaps a small shed for maintenance supplies – nothing of environmental concern. There were also no stained soils or unusual odors noted on the grounds, and no nearby properties with obvious problems (the lot was adjacent to roads and a commercial area, but no leaking drums sitting next door or anything overt). The reconnaissance also includes viewing the neighbors as much as possible from the site boundaries – e.g. if there’s a gas station next door, the assessor will note its conditions (any spills, vent pipes, etc. visible). In our example, the surrounding uses included some light industrial facilities a block away, but the assessor noted nothing suspicious visible from the subject site. Overall, the site inspection is crucial to find any observable red flags that paperwork might not reveal. It’s also an opportunity to identify things like suspect hazardous building materials (asbestos, lead paint) or other issues on the property, even though those are outside the core scope – more on this later.

• 3. Interviews: A Phase I ESA involves interviewing people who might have knowledge about the property’s environmental conditions. The ASTM standard requires attempts to interview the current owner and occupant (if not the same) and also allows for interviews with past owners or employees, neighbors, or local government officials as needed. The purpose is to glean any firsthand information about spills, tank installations/removals, waste disposal practices, or other environmental incidents that might not be in written records. In many cases, a questionnaire is sent to the owner or manager to fill out. In the Texas motel ESA, for instance, the consultant provided a Pre-Survey Questionnaire to the property contact to ask about any known environmental issues, past uses, or the presence of things like asbestos, mold, etc. The site contact indicated no knowledge of any environmental releases or hazardous substance usage beyond normal cleaning/maintenance products. Local government agencies (fire department, health department) might also be contacted for records or insights. For example, fire department records can reveal if any underground tanks were ever registered or removed, or if there were emergency responses to spills at the address. Interviews with long-term employees or neighboring property owners can sometimes surface anecdotal info (e.g. “Years ago there used to be a dry cleaner in that building that dumped solvents out back”). ASTM E1527-21 also requires the user of the report (often the buyer or lender) to be interviewed in a sense – the user is asked if they have any specialized knowledge about the property or if the purchase price is suspiciously low (which could imply environmental issues). These user responsibilities are a part of the process to ensure all obvious information is gathered. In summary, interviews serve as an additional layer of inquiry to supplement the document research and site inspection.

• 4. Report and Conclusions: Finally, the environmental professional compiles the findings into a Phase I ESA report. This report will typically describe all the work done (records reviewed, who was interviewed, when the site was inspected, etc.), document the site’s known history and current conditions, and then present the assessor’s opinions and conclusions. Crucially, the report will state whether any RECs (Recognized Environmental Conditions) were identified. If yes, they are described along with the rationale. The report also notes if any CRECs (Controlled RECs) or HRECs (Historical RECs) are present, and it will call out any significant data gaps or uncertainties. If the property is found to be pretty clean, the report will say something like “no evidence of recognized environmental conditions was identified.” In our example case, the Phase I ESA report concluded that “this assessment has identified no evidence of RECs, CRECs, HRECs, significant data gaps, or de minimis conditions in connection with the subject property.”. That sentence tells the user that, based on all the research and inspection, the consultant did not find anything indicating contamination on the site (past or present) and found no lingering issues from any past contamination. Essentially, it’s a clean bill of health in Phase I terms.

  In addition to the formal conclusion on RECs, the report includes sections discussing any Business Environmental Risks (BERs) (explained below) and any limitations of the assessment. The environmental professional will sign the report, often with a declaration that they meet the EP qualifications and that the assessment was done in accordance with ASTM standards and AAI. Supporting documents, like the full regulatory records search results and historical sources (e.g. aerial photo copies), are attached in appendices. Phase I ESA reports can be lengthy (often 100+ pages with appendices), but the key part for decision-makers is the executive summary and conclusion where RECs and other concerns are clearly stated.

The Phase I ESA process does not include actual testing of soil, water, or building materials – if the Phase I identifies a concern (REC), the typical next step is to recommend a Phase II ESA (which involves sampling and laboratory analysis) to confirm the presence or absence of contamination. Conversely, if the Phase I is clean (no RECs), usually no further investigation is warranted, and the transaction can proceed with environmental issues “checked off.” The Texas motel property case is a good illustration: the Phase I ESA found no RECs, so the consultant did not recommend any Phase II sampling. The only issue noted was an asbestos materials concern (which we’ll detail next), but that is a maintenance/renovation consideration, not something that would halt a property transfer.

Understanding Phase I ESA Findings: RECs, CRECs, HRECs, and BERs

Phase I ESA reports often boil down to a discussion of whether certain conditions are present, typically abbreviated as REC, CREC, HREC, or sometimes de minimis conditions. These terms come from the ASTM E1527-21 standard and have specific meanings:

• Recognized Environmental Condition (REC): In simple terms, a REC is a red flag – it means there is a known presence or likely presence of hazardous substances or petroleum products on a property due to a release (spill, leak, disposal) in the past, present, or the material threat of a release in the future. A REC indicates real or probable environmental contamination. For example, evidence of an old buried fuel tank that might have leaked would be a REC, as would stained soil with petroleum odor, or a groundwater plume of solvents coming onto the property from a neighbor. It’s essentially what the Phase I is looking for. Common examples of RECs (especially in Texas) include an undocumented old underground storage tank (like on a former gas station property), visibly oil-stained ground at a former auto repair shop, or being adjacent to a site with known contamination migrating in groundwater. Importantly, a Phase I ESA identifying a REC doesn’t confirm the severity of contamination – it flags the issue, and usually a Phase II ESA (sampling) is then needed to verify what contaminants are present and at what levels. From a business standpoint, the presence of a REC in a report is a big deal: it will almost certainly raise concerns for a lender and will trigger further investigation (and possibly cleanup) before the deal can move forward. In our example property, the consultant fortunately found no RECs on the motel site – no signs of contamination were present. That means the buyers and lenders could breathe easy that there were no obvious environmental liabilities. Had a REC been found – say, if the motel’s back lot had a suspicious chemical odor and soil staining – the report would have recommended a Phase II ESA to test that soil.

• Controlled Recognized Environmental Condition (CREC): A CREC is a unique subset of REC. It refers to a past release of hazardous material that has been addressed to the satisfaction of regulators, but with contamination allowed to remain in place under certain controls. In other words, the site has contamination that is “under control” through legal or physical restrictions. For instance, maybe the property had a spill that was cleaned up to a point, but not entirely removed – instead, the state regulator issued a closure with an institutional control like a groundwater use prohibition (no drinking water wells allowed) or required that a concrete cap remain over the contaminated soil. That situation would be a CREC: contamination is still on site, but it’s considered controlled by specific conditions. The ASTM definition emphasizes that hazardous substances remain but subject to required controls like land use restrictions (Activity and Use Limitations, or AULs). An example in practice: a property in Austin might be within a Municipal Setting Designation (MSD) area that prohibits using the shallow groundwater due to known contamination – if you buy that property, you must abide by the no-water-use restriction, because there are contaminants left in the groundwater below. That would be a CREC. From a buyer/lender perspective, a CREC means “you have an ongoing responsibility.” You can own the property, but you inherit the duty to maintain the protective measures (and you could be in trouble if you fail to, say, maintain the cap or if you breach the land use restrictions). CRECs often impact property value and future use – for example, if you intend to redevelop, you may have to work around or remove the residual contamination. In a Phase I report, CRECs are highlighted because they are effectively RECs that are known but require vigilance. Our Texas motel property did not have any CRECs identified – it wasn’t part of any ongoing cleanup or restrictive covenant. But imagine if a neighboring lot had a plume that extended under the motel property, and it was under a state restriction not to pump groundwater; that would likely show up as a CREC in the report, alerting the owner to that condition.

• Historical Recognized Environmental Condition (HREC): An HREC refers to a past release of hazardous substances or petroleum that was cleaned up to regulatory standards and achieved closure such that it no longer poses a threat and no controls are necessary. In plain language, an HREC is a problem from the past that has been fully resolved. For a condition to be an HREC, it usually means the site was contaminated, underwent remediation, and the regulators gave it a clean bill of health for unrestricted use. For example, suppose years ago a leaking underground tank on the property caused soil contamination, but the tank was removed and all the contaminated soil was excavated and the state environmental agency issued a “No Further Action” letter. If environmental standards haven’t become more stringent since then, that would be considered a Historical REC – it’s part of the property’s history, but it’s not a current issue. HRECs are important for context but typically do not require action as long as conditions haven’t changed. They essentially tell you “yes, there was a spill here, but it was taken care of.” However, the EP must also consider if old cleanups meet today’s standards. If something was cleaned up to 1990s standards but would not meet updated criteria, the EP might still consider it a REC or issue to look at. But if it’s truly resolved for unrestricted use, it stays an HREC and is not counted as a REC in the current assessment. In our example Phase I, they reported no HRECs for the motel property, meaning there was no record of any past contamination on-site that had been remedied. A hypothetical example of an HREC might have been if decades ago a small oil spill in the parking area was cleaned up and officially closed – the Phase I might mention that as a historical incident that’s no longer a concern. (Off-site cleanups, by the way, aren’t called HRECs unless they affected the subject property; they are usually discussed as part of the surrounding record review.)

• Business Environmental Risk (BER): A Business Environmental Risk is a broader category of risk that falls outside the strict scope of a Phase I ESA but might be relevant to the owner/user’s interests. ASTM E1527-21 defines a BER as “a risk which can have a material environmental or environmentally-driven impact on the business associated with the property, not necessarily limited to CERCLA hazardous substances.” This can include issues that the standard calls non-scope considerations – things like asbestos-containing building materials, lead-based paint, radon, mold, or even compliance issues and natural hazards. While the Phase I ESA’s core purpose is to find RECs (potential contamination) for CERCLA purposes, many reports also discuss these other issues in a section of the report, because they can affect the property’s value or the safety of its occupants. For example, the presence of asbestos in an older building is not a “REC” (since asbestos is a hazard if disturbed, but it’s not a release to the environment in soil or groundwater). However, asbestos can be a major concern for a building owner (due to health risks during renovation or demolition and associated costs), so it’s considered a Business Environmental Risk. In the Phase I ESA of the Texas hospitality property, the consultant identified exactly this kind of BER: suspect asbestos-containing materials (ACMs) in the building. The motel was built in the 1980s, so the environmental professional conducted a limited visual survey for asbestos. They observed that certain materials – like popcorn-textured ceilings, sheetrock joint compound, vinyl floor tiles, and some roofing and caulking – were likely to contain asbestos, as was common in that era. These materials were found to be in good condition (not damaged or friable, except a small damaged spot of ceiling in a storage area) and thus not an immediate hazard. The report noted that since the asbestos is contained and undisturbed, it “does not currently pose a significant environmental threat” to occupants. However, if renovations were to occur, there could be a need for proper asbestos testing, abatement, and disposal to avoid fiber release. The key point the consultant made was that asbestos is a Business Environmental Risk and is not considered a REC. They flagged it so the user is aware of it, but it doesn’t count as a recognized environmental condition under the Phase I standard. This is a great practical example of a BER finding: it doesn’t implicate soil/groundwater contamination, but it’s an important environmental consideration for the buyer to plan for (in terms of future renovation costs and safety).

  
  

  Other examples of BERs might include lead-based paint in an old building (a potential issue if children are present or during remodeling), mold or indoor air quality issues, vapor intrusion risks from nearby contamination (if not covered under REC), or even regulatory compliance problems (say the current operator has undocumented hazardous waste – not a CERCLA issue per se, but a business risk). Another scenario that can be discussed as a BER is when the intended future use of a property clashes with an environmental condition. For instance, consider a buyer who wants to develop a residential apartment on a site that currently has a contamination left under an industrial use restriction (a CREC). The Phase I report’s BER section might discuss that conflict: the planned use is residential but there’s an environmental use limitation on site, meaning the buyer would need to do additional remediation or negotiate with regulators to allow the change. In summary, BERs are issues that could materially impact the property’s value, usability, or the owner’s obligations, even if they aren’t part of the standard Phase I ESA scope. Good Phase I reports will identify such issues so that the client is not blindsided by them later. It’s worth noting that addressing BERs is often optional – some clients specifically request inclusion of, say, an asbestos survey or radon test as an add-on. But even if not formally investigated, the EP usually notes obvious BER concerns observed (like suspect mold or asbestos) qualitatively. In our Texas motel example, the asbestos finding was the only BER highlighted, and it came with the recommendation that no action is needed unless the building is disturbed, though future sampling/abatement should be budgeted if renovation is planned.

To recap the acronyms: RECs = potential contamination problems; CRECs = contamination controlled by conditions (you inherit management duties); HRECs = old contamination issues that have been cleaned up fully; BERs = other environmental risks (outside of RECs) that might affect the property or transaction. When reviewing a Phase I ESA report, these terms tell you the bottom line. No RECs means no major environmental issues found. A listed REC means further investigation (Phase II) is likely needed. A CREC or HREC gives context about past issues – HREC being effectively resolved, CREC requiring ongoing care. And BER alerts you to things like asbestos or other concerns to factor in business decisions.

In the case study of our hospitality property, the Phase I ESA’s conclusions section explicitly stated: no RECs, CRECs, or HRECs were found, but asbestos-containing materials were noted as a BER. This gave the lender and buyer comfort that there were no contamination liabilities, while also advising them of a building maintenance/remediation consideration down the line (asbestos). Overall, that is a favorable outcome for a Phase I ESA – many older commercial sites do turn up some REC (for instance, a leaking tank or an adjacent property’s issues). Here, the due diligence showed a clean site except for the common issue of asbestos in building materials, which is manageable.

Limitations of Phase I ESAs

While Phase I ESAs are an indispensable tool, it’s important to understand their limitations. A Phase I ESA is often described as a qualitative, first-step investigation. By design, it is limited in scope and does not conclusively prove a property is contamination-free – it can only report no evidence of problems within the scope of the inquiry. Key limitations include:

• No Sampling or Testing: A Phase I ESA does not involve collecting soil, groundwater, or air samples for laboratory analysis. The assessment is limited to what can be observed visually and found in records. There is no intrusive investigation (no drilling, digging, or testing of building materials in a standard Phase I). This means that Phase I findings are somewhat circumstantial. If a Phase I finds no REC, it generally means there were no indications of contamination – but it is not an absolute guarantee that the property is clean below the surface. There could be contamination that left no surface traces and isn’t documented anywhere (for example, an owner illegally dumping chemicals without anyone knowing). The Phase I would not catch that unless there was some hint like dead vegetation or a record of chemical purchase. Thus, absence of evidence is not evidence of absence – but it’s the best we can do non-invasively. Conversely, if a Phase I does find a REC (like a stain or an old record of a spill), it doesn’t quantify the risk; sampling in a Phase II is needed to confirm. Stakeholders should understand this limitation: Phase I ESA is a bit like a physician doing a patient history and external exam – if everything looks fine, great, but you haven’t done blood tests or X-rays. If something looks off, the “doctor” will recommend further tests (Phase II). This is by design, as Phase IIs can be costly and unnecessary if Phase I finds nothing suspicious.

• Scope Exclusions: Some environmental issues are beyond the scope of ASTM E1527-21, meaning the Phase I is not required to investigate them (except as they might tangentially appear in records or observations). The standard explicitly excludes things like asbestos, lead-based paint, radon, lead in drinking water, and mold from being RECs because they are regulated under different frameworks (not CERCLA). However, as discussed under BERs, these can still be important. The limitation is that a Phase I ESA will typically note obvious non-scope issues but will not definitively evaluate them. For instance, the consultant might observe suspect asbestos materials but will not sample them within the Phase I. Confirmatory testing for asbestos or lead paint requires a specialized survey outside the Phase I scope. Similarly, a Phase I might mention general information on radon (e.g., whether the site is in a high-radon area) but won’t include radon air testing unless specifically contracted. If a client is concerned about these issues, they must request additional assessments (like an asbestos survey, lead paint inspection, mold assessment, or radon test) in parallel with the Phase I. The bottom line is that the standard Phase I ESA focuses primarily on contamination of soil/groundwater and does not automatically cover all environmental health and safety issues in a building. There is a common misconception that a Phase I ESA is a catch-all environmental inspection – it is not. Each property may need a tailored approach. For example, a warehouse might have no RECs but could be full of old friable asbestos insulation – the Phase I’s job is to flag the latter as a BER, but addressing it would need a separate asbestos inspection. Developers and lenders should recognize these scope boundaries to avoid false security. Phase I ESA reports often include a disclaimer that issues like asbestos, mold, wetlands, compliance audits, etc., were not part of the assessment unless otherwise noted.

• Reliance on Available Information: A Phase I ESA is largely a document research exercise, and it can only be as good as the information available. Sometimes there are data gaps – missing or incomplete information. For instance, historical records might not be available for certain periods, or a government archive could be inaccessible within the project timeframe. ASTM E1527-21 requires the environmental professional to comment on any significant data gap (e.g., “the aerial photo collection did not have images between 1950 and 1970, which is a gap in determining uses in that era”). In most cases, professionals can bridge gaps with multiple sources or conclude that a gap doesn’t likely affect the outcome. But it’s a limitation to acknowledge – the assessment might not have 100% of all records. Similarly, interviewees might not be forthcoming or knowledgeable, and there could be undisclosed issues. Phase I ESAs assume that if something was sufficiently harmful or large, there would be some sign (record or physical evidence). Small releases or well-concealed problems might escape detection.

• Time Sensitivity: Interestingly, Phase I ESAs have a shelf-life. Under ASTM/EPA rules, a Phase I is considered valid for 180 days (6 months) before certain components need updating, and fully expires after one year. This means if your Phase I was done and then your closing got delayed more than 6 months, you need to update key aspects (like run a fresh database search, redo the site walk, etc.). After a year, you’d need a completely new Phase I. This limitation exists because conditions can change – new contamination could occur, or new records could come to light. For developers and lenders, this is important: don’t conduct your Phase I too early, or if you do, be prepared to refresh it if the transaction doesn’t close promptly. Most lenders in fact will require the Phase I to be within 6 months of closing to rely on it. The Phase I report will usually state the date of inspection and records search, so everyone knows the clock. In our example, the Phase I was done in September 2025 for a transaction closing shortly after; if that deal had dragged into mid-2026, an update would have been needed.

• Not a Guarantee – Professional Judgment: Finally, a limitation to stress is that a Phase I ESA is based on professional judgment of the environmental consultant, following a standard process, but it cannot guarantee a clean site. It greatly reduces uncertainty, which is why it’s valued. If the EP says “no RECs found,” it means they did a thorough job and truly found no evidence to suggest contamination – thus the likelihood of major issues is low. It doesn’t mean there is zero risk. Buyers and lenders should still exercise normal caution (e.g., ensure proper insurance is in place, etc.). That said, if a Phase I is done well, the residual risk of unknown issues is small, and you have met your legal duty of due diligence. The alternative – not doing one – is far riskier.

In summary, the Phase I ESA is an extremely useful due diligence tool with a well-defined scope. Its limitations are mainly that it’s non-intrusive and focused on specific types of issues. It identifies potential problems; confirming those (or their absence) might require Phase II testing. It also doesn’t automatically cover issues like building hazards (asbestos, etc.) unless you ask for it. Real estate developers and lenders should use the Phase I ESA as part of a broader risk management strategy: if it’s clean, great – if it finds issues, take them seriously and investigate further. And always remember its findings are based on info available at that time. Despite these limitations, when Phase I ESAs are conducted by experienced professionals in accordance with ASTM standards, they have proven remarkably effective at protecting buyers and lenders from nasty surprises. They bring environmental transparency into the deal-making process.

Conclusion

Phase I Environmental Site Assessments have become a standard and essential component of commercial real estate due diligence in the U.S. They provide a systematic, standardized way to assess environmental risk at a property before money changes hands. For developers, a Phase I ESA helps ensure you’re not walking into a costly contamination cleanup or a project-halting hazard. For lenders, it’s a safeguard that the property securing the loan isn’t a financial time bomb. Phase I ESAs also enable purchasers to qualify for federal liability protections, fostering the redevelopment of properties that might otherwise be avoided out of fear of environmental unknowns.

In this guide, we’ve covered what a Phase I ESA involves – from records research to site inspection to the final report – and explained the key findings and terms you’ll encounter, like RECs, CRECs, HRECs, and BERs. We also integrated real-world context from an actual Phase I ESA of a Texas hospitality site, illustrating how, even when no contamination issues are found, a Phase I report provides valuable information (such as the presence of asbestos materials, in that case) that new owners should be aware of.

The clear takeaway is that Phase I ESAs are worth the investment. They mitigate risk in transactions by bringing environmental issues to light before a deal is sealed. They also facilitate smoother transactions – a property with a clean Phase I in hand is much more attractive to buyers, lenders, and insurers. If issues are found, it doesn’t always kill the deal; often, it leads to solutions (remediation plans, price adjustments, liability insurance) that can be worked out if the property is otherwise desirable. What’s important is that the issues are identified and quantified, rather than remaining unknown variables.

As we move forward in 2025 and beyond, environmental due diligence is only growing in importance. Regulatory changes (like new hazardous substance designations and vapor intrusion guidance) and an increased focus on sustainable, safe development mean that Phase I ESAs will continue to evolve (the recent ASTM E1527-21 update being a prime example). Real estate professionals – whether you’re a developer assembling land for a project or a lender underwriting a loan – should stay informed about these practices. Working with qualified environmental professionals and understanding Phase I ESA reports will empower you to manage environmental risks effectively.

In conclusion, a Phase I Environmental Site Assessment is a foundational tool for risk management in real estate deals. It is conceptual in approach (inquiry and observation-based) yet practical in outcome, often determining the viability or terms of a property transaction. By identifying recognized environmental conditions and other risks, Phase I ESAs protect stakeholders from unforeseen liabilities and help ensure that property development and investment can proceed responsibly. Always insist on a thorough Phase I ESA for your projects – it’s a small step that can avert huge problems, allowing you to proceed with confidence in the environmental integrity of your investment.

October 31, 2025, by a collective authors of MMCG Invest, real estate feasibility study consultants.

Sources: 

The insights and information above were drawn from ASTM standards and guidance, U.S. EPA regulations and resources, and industry publications, as well as an anonymized Phase I ESA report for a Corpus Christi, Texas hospitality property prepared in 2025. Key definitions of terms like REC, CREC, HREC are based on the ASTM E1527-21 standard, and the importance of Phase I ESAs for liability protection is supported by EPA’s All Appropriate Inquiries rule. Practical examples of findings (such as asbestos as a BER) were referenced from the case study report, and typical lender requirements and due diligence practices are corroborated by industry analyses. These sources collectively reinforce the best practices and considerations outlined in this article.