News | January 4, 2001

Avoiding the top 10 mistakes of doing due diligence — Part 4: Background Checkout

The Phase I Environmental Site Assessment is designed to identify areas of potential soil or groundwater contamination and consists of a site inspection and a review of public and private records to ascertain the present and past regulatory and operational history of the site.

By Lawrence P. Schnapf

Part 1 and Part 2 of this series mostly defined the importance of doing due diligence and the consequences of failing to do so. Part 3 set out the essential needs for undertaking the job, the beginning of which is covered here—after a brief description of some additional preliminary work requirement, namely, arriving at a SOW.

Preparing and Reviewing the SOW
Before commencing a project involving environmental concerns, the consultant should prepare a scope of work (SOW) unless the client, as part of the bid package, previously prepared it. The SOW probably is the most critical document in the due-diligence process because it determines how the investigation will be performed.

The scope of work is developed using the information that is already available from the existing company or regulatory records as well as the responses to the questionnaire or transaction screening. It should include

  • descriptions of the specific tasks to be performed,
  • the schedule for each task, and
  • a cost estimate for the project.
  • Specifically, SOW will indicate

  • the number of facilities to be visited,
  • the priority of the site inspections,
  • the extent and nature of any sampling to be performed,
  • the kinds of substances that will be analyzed,
  • off-site disposal practices, and
  • the kind of regulatory information that will be collected.
  • Staffing. Once the scope of work is approved, the consultant will have to determine its staffing needs.

    Generally, each

  • site inspection could require two person-days,
  • collection of regulatory information could consume an additional two person-days,
  • preparation of a draft report will require another couple of days, and
  • oversight by management will add another person-day to the project.
  • As a result, a site inspection typically will cost between U.S.$5000 and $7000 per industrial facility—without soil or groundwater sampling.

    Sampling, if required, could add $10,000 to $20,000 to the cost of each site, depending on

  • the number and depth of the wells that have to be installed,
  • the number of soil samples,
  • the kinds of parameters to be analyzed, and
  • the time that the laboratory has to analyze the samples.
  • Phase I Environmental Site Assessments
    Environmental due diligence customarily is performed in phases since this will be the most cost-effective methodology. Under this approach, each investigative phase is based on the information gathered in the preceding phase. Thus, it is extremely important that each phase be performed as thoroughly as possible.

    The Phase I Environmental Site Assessment (ESA) is designed to identify areas of potential soil or groundwater contamination. The Phase I ESA consists of a site inspection and a review of public and private records to ascertain the present and past regulatory and operational history of the site.

    This ESA should include the following:

    • Title search - Title records can reveal a wealth of vital information. Records should be reviewed to reconstruct the chain of title as far back as possible to determine if the property was previously used for on-site generation, storage, or disposal of hazardous materials. This information can be obtained from title abstracts, tax records, sub-division maps, building or land-use permits, and interviews with local officials. However, if the owner was not the operator of the site, this process may not reveal prior operating history or uses of the site.

    • Historical facility records - Manufacturing or chemical facilities that have been in existence for a long time probably have changed their environmental practices significantly. Therefore, areas of a facility that may not appear to pose any current environmental risk may have been used in the past as lagoons, landfills, or disposal areas. If there are areas at a site where hazardous materials were handled or disposed, corrective action may be required in the future. Thus, it is important for the purchaser to review site plans, plats, engineering surveys, blueprints, and aerial or historical photographs that may locate structures, underground storage tanks, PCB transformers or capacitors, floor drains, sewer lines, lagoons, settling ponds, trenches, railroad tracks, areas of hazardous-waste storage, and the presence of asbestos. Former employees who may have knowledge about past practices should also be interviewed where they can be located.

    • Regulatory compliance records - Businesses subject to environmental regulation are required to maintain a variety of records on the site and are obligated to file reports with state and federal environmental agencies. These will include environmental permits and applications, hazardous-waste manifests and notifications, monitoring and discharge reports, spill reports, underground storage-tank registrations, environmental-consultant reports and correspondence, notices of violations, consent decrees, financial reports indicating expenditures for pollution-control equipment or reserves for environmental liability, and insurance policies, records, and procedures for compliance with right-to-know, training, and other health and safety requirements of OSHA. When reviewing permits, the examiner should confirm that the trans-feree is the permit holder and that the permit has not expired.

      And note! Contacts with regulatory agencies must be handled with extreme care to avoid triggering reporting obligations.

    • Neighboring properties - Because nearby properties can be a source of contamination and may be impacted by contamination migrating from such a facility, the consultant should observe properties within a one-mile radius and, as well, review state and federal database filings within the geographic range.

    • Off-site disposal facilities - When purchasing a business it is important to identify the disposal facilities where the company sends and has sent its hazardous wastes to ascertain if it faces any potential CERCLA generator liability.

    Getting Past the Phase I Report
    When the Phase I report is completed, the consultant should orally review the results of the investigation with the client and the attorney. If time is short, more frequent oral debriefings may take place at set intervals or after the investigation of certain key facilities are completed.

    Following the oral report, the consultant should prepare a draft report for review by the attorney. One of the most important tasks of the attorney is to make sure that the report is limited as much as possible to factual observations. Conclusions or opinions regarding status of regulatory compliance or speculations on the sources of potential contamination should be excluded.

    The reason for strictly reporting only observations is that many clients will not be prepared to address all of the noncompliance issues that may be raised by a report, and their existence in a report could be used by a government agency in a subsequent civil or criminal enforcement action as evidence of willful or deliberate noncompliance with environmental laws.

    Should the attorney make substantive changes to the draft Phase I report, a revised draft should be forwarded to the attorney and a final Phase I report should not be issued until the attorney approves the revised draft. The final Phase I report should be issued to the attorney.

    Next installment: Phase II ESA and beyond

    About the author: Lawrence P. Schnapf, Esq. is a New York City-based environmental lawyer whose practice at Schnapf & Associates concentrates on environmental issues associated with business and real-estate transactions. He is also an adjunct professor at New York Law School where he teaches "Environmental Problems in Business Transactions." He also is the author of "Environmental Liability: Managing Environmental Risk in Corporate/Real Estate Transactions and Brownfield Redevelopment". He has an environmental law website at and is a principal at Schnapf & Associates, 55 E. 87th Street #8B, New York, New York 10128. Tel: 212-996-5395; Fax: 503-213-9314; E-mail: (Back to top)