When Is An Environmental Site Assessment Required In The Carolinas?

You might have heard someone mention a Phase 1 Environmental Site Assessment when buying a commercial property, applying for financing, or planning a new development. 

But when is an environmental site assessment required exactly?

For starters, a Phase 1 ESA isn’t legally required for every commercial property transaction. However, it is often required by lenders, investors, or government agencies as part of the due diligence process.

For instance, let’s say you’re purchasing a commercial property in North or South Carolina with bank financing. In this case, there’s a good chance your lender will ask for a current Phase 1 ESA before approving your loan.

Also, even if no one requires one, skipping an environmental site assessment can expose you to costly environmental liabilities that aren’t visible during a standard property inspection.

In this blog, I will explain it all. So, read on to know:

• When an environmental site assessment is required
• Why lenders often require a Phase 1 ESA before approving loan
• When you might not need an environmental site assessment
• How a Phase 1 ESA helps protect buyers, lenders, and developers

Key takeaways

• A Phase 1 ESA is not legally required for every commercial property transaction.
• Commercial lenders  require a Phase 1 ESA before approving financing.
• A Phase 1 ESA is recommended when purchasing, refinancing, or developing commercial property.
• Properties with a history of industrial or commercial use often require additional environmental due diligence.
• Completing a Phase 1 ESA can help you for certain federal liability protections by meeting EPA’s All Appropriate Inquiries (AAI) requirements.
• If environmental concerns are identified, a Phase 2 ESA can be recommended.

When is an environmental site assessment required?

A Phase 1 environmental site assessment is not automatically required by law every time you buy a commercial property. 

Instead, whether or not you need a Phase 1 ESA depends on your property, the type of transaction, and the requirements of the parties involved. 

For instance, you might need a Phase 1 ESA if:

• You’re purchasing commercial real estate.
• You’re applying for commercial financing.
• A lender requires environmental due diligence before approving a loan.
• You’re redeveloping a property with a history of commercial or industrial use.
• You’re purchasing a property that might have handled hazardous materials in the past.

In most cases, the environmental site assessment requirements are driven by lenders, investors, insurers, or buyers who want to understand the environmental risks associated with a property before moving forward.

Overall, here’s when you may or may not need an environmental site assessment:

Situations where you’ll likely need a Phase 1 environmental site assessment

Although a Phase 1 ESA isn’t legally required for every commercial property transaction, there are several situations where obtaining one is either highly recommended or expected.

Let’s look at the most common examples.

1. You’re purchasing commercial real estate

This is by far the most common reason buyers order a Phase 1 environmental site assessment.

Before investing in a commercial property, you’ll want to know whether there are any environmental concerns that could affect its value, future development, or ownership.

For instance, the property might have previously operated as:

• A gas station
• An auto repair shop
• A manufacturing facility
• A warehouse
• A dry-cleaning business

Even if those operations ended years ago, they might have left behind environmental contamination that isn’t visible today.

A Phase 1 ESA helps identify potential environmental risks before the transaction closes, giving you the information you need to make an informed decision.

2. You’re applying for commercial financing

If you’re financing the purchase of a commercial property, your lender might require a Phase 1 ESA before approving the loan.

Why?

That’s because lenders want to understand whether environmental issues could affect the property’s value or make it more difficult to sell if they ever need to recover the asset.

This is why many banks, credit unions, SBA lenders, and other financial institutions include a Phase 1 ESA as part of their underwriting process. In some cases, they might even require the assessment before issuing final loan approval.

3. You’re developing or redeveloping a property

Planning to construct a new commercial building or redevelop an existing site?

If yes, a Phase 1 ESA is often one of the first environmental due diligence steps.

That’s because you want to understand the property’s environmental history early in the project in order to identify issues that might affect construction schedules, permitting, or future development costs.

This is especially important when redeveloping older commercial or industrial properties where historical uses might have involved hazardous materials or underground storage tanks.

4. You’re purchasing a higher-risk property

Some properties naturally carry a greater likelihood of environmental concerns because of the businesses that previously operated there. These commonly include:

• Manufacturing facilities
• Industrial buildings
• Fuel stations
• Vehicle maintenance facilities
• Warehouses
• Dry cleaners
• Agricultural or chemical storage properties

5. You’re refinancing certain commercial properties

Some lenders also require updated Phase 1 ESA reports when refinancing commercial real estate. This helps them evaluate whether environmental conditions have changed since the original financing or whether new information has become available.

Now, not every refinance requires a new Phase 1 ESA, but it is very common for larger commercial transactions or older environmental reports.

In short, here’s when is an environmental site assessment required:

When is an environmental site assessment not required?

Although Phase 1 ESAs are common in commercial real estate, they aren’t necessary for every property transaction. For instance, you might not need one if you’re:

• Purchasing a single-family home for personal use.
• Buying a newly developed residential property with no history of commercial or industrial use.
• Completing a transaction where the lender doesn’t require environmental due diligence and the property’s history presents little environmental risk.

That said, every property is different.

For instance, let’s say you’re purchasing what appears to be a small office building.

On the surface, everything looks perfectly normal. But years ago, the same property might have housed an auto repair shop or a fuel storage facility.

That’s why many buyers choose to get a Phase 1 ESA even when it isn’t strictly required. The assessment provides them valuable information that helps reduce uncertainty before making a significant investment.

Why do lenders require a Phase 1 environmental site assessment?

Lenders aren’t just financing the property, they’re also managing risk.

If environmental contamination is found after the loan is issued, it can reduce the property’s value, delay future development, and make the property much harder to sell.

That’s why many banks and commercial lenders require a current Phase 1 ESA before approving financing.

The assessment gives them a better understanding of the property’s environmental history and whether there are any potential concerns that need further investigation.

You might also want to read: Phase 1 Vs Phase 2 Environmental Site Assessment: What’s The Difference?

Conclusion

I am sure you now have a clear idea of when is an environmental site assessment required.

While a Phase 1 ESA isn’t legally required for every commercial real estate purchase, it is required by lenders and frequently recommended for buyers, developers, and investors.

Also, even if it is not required by lenders, getting an ESA as part of pre-purchase due-diligence can save you from unwanted liabilities down the road. 

Got more questions or need a Phase 1 ESA in North or South Carolina?

You can get in touch with us!

At NewTech Engineering, we provide Phase 1 Environmental Site Assessments for commercial real estate transactions throughout North and South Carolina.

Whether you’re purchasing a property, applying for financing, or planning a development project, our experienced team can help you understand potential environmental risks and meet your due diligence requirements.

FAQs about environmental site assessment requirements

When is an environmental site assessment required?

A Phase 1 environmental site assessment is typically required during many commercial real estate transactions, particularly when purchasing, refinancing, or developing commercial property. 

While it isn’t legally required for every transaction, many lenders require one as part of the financing process.

When is a Phase 1 ESA required?

A Phase 1 ESA is commonly required when applying for commercial financing, purchasing higher-risk commercial properties, redeveloping previously developed sites, or when a lender, investor, or agency requires due diligence.

Why do I need a Phase 1 environmental site assessment?

A Phase 1 ESA helps identify potential environmental risks associated with a property before you purchase or develop it. It also supports informed decision-making and might help qualify buyers for certain federal liability protections when completed in accordance with EPA’s All Appropriate Inquiries (AAI) requirements.

Is a Phase 1 ESA legally required?

Not always. 

There is no federal law requiring a Phase 1 ESA for every commercial property transaction. However, many lenders, investors, and buyers require one as part of their due diligence process, and it is often considered an industry best practice.

Does every commercial property need a Phase 1 ESA?

No. Whether a property needs a Phase 1 ESA depends on factors such as the property’s history, the type of transaction, lender requirements, and the potential for environmental risk.

What happens if a Phase 1 ESA identifies environmental concerns?

If the assessment identifies potential environmental concerns, known as Recognized Environmental Conditions (RECs), the environmental consultant might recommend a Phase 2 Environmental Site Assessment. This can include soil, groundwater, or other environmental testing to determine whether contamination is present.