There is nothing worse for a property owner than to find out their property has an environmental problem. Contamination is one of the few hurdles that often cannot be overcome. Usually, the problems for the owner could have been avoided if they had done the proper investigation when they purchased the property.
As a commercial broker, I often gets calls from people seeking advice on how to deal with a bad environmental situation. Most of the time, the broker was hired to sell the property, found a buyer, and an inspection report noted some type of problem that derailed the transaction.
When buying a large tract of land or a commercial property, it’s always recommended that buyers hire an environmental engineer to conduct a “Phase I” environmental assessment. The Phase I report will let a buyer know if there are any historic contamination issues with the site or with other surrounding properties. Typically, the report will also include info on any underground storage tanks, historic uses, aerial photography from previous years, and more data that is valuable to a property owner.
Phase I environmental assessments will typically cost $2,500 to $5,000, depending on the size and complexity of the property. The majority of the assessment is paperwork that is amassed from a variety of sources. The report also includes an on-site inspection. On-site inspections are where most problems arise. When reading over the Phase I, a buyer is looking for four key words. “NO FURTHER ACTION REQUIRED”
Sellers should take several steps to ensure that the Phase I on-site inspection comes back favorably. Below is the checklist I provide sellers as a guide.
- Walk the property and look for potential adverse items.
- Remove any abandoned or unnecessary vehicles.
- Any oil or chemical stains should be remediated well in advance.
- Any drums need removal. Empty drums, oil drums, water drums, etc… all should be removed to avoid any questions.
- Any underground tanks properly removed and sealed. Make sure permits and inspections are done properly. If there are underground tanks remaining, make sure the area around the tank is clean and the tank is marked clearly.
- Areas near above ground tanks should be clean and have proper coverings under the tank. Never have an above ground tank sitting above soil.
- Make sure any areas that are used for drainage are clear and free from debris.
- Paved areas are clear and clean from oil stains and trash.
- Septic tanks, if any, are clearly marked and areas around it are clean and landscaped.
If sellers follow this list, many of the pitfalls that show up in a Phase I to kill transactions can be avoided.
What happens if there is a problem noted in the Phase I?
Once the seller and broker know about the problem, they are obligated to disclose it to any future buyers. If a seller refuses to disclose the problem in the future, they could face legal consequences. If the seller remediates the issue, they are still obligated to disclose the fact there was a problem. They should notate how the problem was remediated and often that will satisfy the next environmental engineer doing an assessment.
If a buyer wishes to continue forward and purchase the property with the problem, they can do so, but they would be inheriting the potential liability for any cleanup or remediation. I have never seen a lender move forward with a transaction without a “clean” Phase I that says, “No further action required.” There are good reasons for this, since the bank may one day have to foreclose and take ownership of the property. Banks are always afraid of owning property with potential environmental issues.
Phase I’s typically indicate one of three things. The first and most common is that the property is clean. The second is that the Phase I recommends some type of remediation that could have easily been avoided had my above list been followed. Lastly, the Phase I can recommend further investigation through either some sort of limited spot testing or a full Phase II environmental assessment.
Phase II assessments differ in one major way. They include bore samples. These reports can vary in cost from $10,000 to $100,000, depending on the complexity and number of samples needed. The more boring/soil samples taken and evaluated, the more expensive the report. Likewise, the more clean soil samples evaluated and received, the lower the risk that the property is contaminated. If a lender is involved, they will often set the standard on how many samples and where they have to be taken in order to satisfy the underwriters requirements.
When buying a commercial property, the first thing purchasers should request is any previous environmental assessments. The age of the report and what the property has been used for since the report was written will determine if a new report is needed.
If questions exist about any existing reports or new reports, always consult an environmental attorney for advice.
Joe Edge is the Real Estate Columnist and Publisher for The Augusta Press. Reach him at joe.edge@theaugustapress.com
