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Levels of Due Diligence in New Jersey-Do I Need a Phase I AND a Preliminary Assessment?

Carrie Berry, LSRP

The commercial real estate world is a constant state of assessing risk, creating investment strategies, and avoiding liability-your first steps could determine how you move forward with your transaction. In any transaction, you should decide what your appetite for risk is-are you comfortable doing your basic due diligence or do you want to dig deeper and have a plan to resolve what could possibly be uncovered? What are the liabilities associated with not pushing further into the remedial process past the initial assessment process? Does conducting a Phase I satisfy the buyer’s requirement for a limitation of liability under that state’s environmental liability law? This question is especially relevant in the State of New Jersey

What are they?

If you’ve ever done even a single commercial real estate deal, you are familiar with a Phase I Environmental Site Assessment (ESA) and the importance of conducting it before buying or selling a property.  In order to get a full picture of the property before you sign on the dotted line, a typical Phase I will include a site visit, research historical records, maps, and directories, and review permitting and zoning for your property. In the State of New Jersey there is a different due diligence report called a Preliminary Assessment (PA).  It is important to be aware that a Phase I ESA is not the same thing as a Preliminary Assessment.  A New Jersey Preliminary Assessment will cover all of the same items as a Phase I in addition to a deeper level of contamination identification, including recommendation(s) should the PA reveal any Areas of Concern (AOC) that require further investigation. In New Jersey, a Preliminary Assessment is necessary to be in compliance with the Technical Requirements for Site Remediation (N.J.A.C. 7:26E) if you want to obtain protection from potential liability as an innocent land owner (under the NJ Spill Compensation and Control Act N.J.S.A. 58:10-23.11). Additionally, industrial properties may require a PA to be conducted during a real estate transaction pursuant to the Industrial Site Recovery Act (N.J.A.C. 7:26B). It is important to note that once the due diligence period is over, any newly discovered environmental issues could fall on the new property owner regardless of chain of title. The Preliminary Assessment can assist with innocent purchaser protection, but only if the PA or Site Investigation activities are conducted prior to closing.

How are they different?

There are marked differences in conducting a Phase I ESA and performing a PA. A New Jersey Preliminary Assessment is far broader in scope than a Phase I and is more likely to result in a recommended Site Investigation or a Phase II. While a Phase I will identify any RECs (recognized environmental concerns), which tend to be broader in scope and less regulatory-focused, a PA will identify the more comprehensive AOCs (areas of concern) and take the local regulations into consideration. The more extensive environmental factors covered in a Preliminary Assessment include a search/evaluation of the Site, specific to both current and historic operational and environmental information to determine if there has been any confirmed or potential releases or discharges.  Additionally, in a PA, an “order of magnitude” evaluation will be conducted by comparing past investigation results to current regulations and standards. There are instances where additional investigation is required due to an order of magnitude investigation.

While it might seem a little difficult to discern one from the other, here are the broad strokes:

1-A Preliminary Assessment covers state (NJ-specific) liability, while a Phase I covers federal liability.

2- A Phase I typically takes 10-15 days while a Preliminary Assessment could take 20-45 days, usually due to the need for mandatory File Review replies from local and state agencies.

3-Preliminary Assessments are priced based on a variety of factors including parcel size (and if there are multiple parcels), historical and current use, any associated environmental investigations, and more comprehensive technical review of all.  All Preliminary Assessments in New Jersey include review by a Licensed Site Remediation Professional (LSRP).

4-A Preliminary Assessment will include recommendations for a Site Investigation if a suspected impact is observed. A Phase I does not require recommendations for further investigation.

In Conclusion

Based on their risk tolerance a lender, seller, or buyer in a NJ commercial real estate transaction can conduct a Phase I ESA as a screening tool to determine possible environmental liabilities at a property; however, especially for buyers there are good reasons to consider doing a Preliminary Assessment instead for a more in-depth look at, and protection from, these potential environmental liabilities.  In the State of New Jersey it is required to conduct a Preliminary Assessment to protect the buyer from becoming responsible for remediating a pre-existing contamination issue. In order to protect yourself and your asset, engaging a properly licensed environmental consultant is essential to navigating the intricacies of environmental investigation.

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