A Phase I ESA is like your common screwdriver, a trusty, and dependable tool that most people know what it is used for, just like buyer due diligence, which is your insurance when buying a property.  A Phase I when completed properly provides protection under CERCLA, the Federal Superfund law, so Federal protection.

A Preliminary Assessment or "PA" is more like the tool in your workbench that you are not 100% sure what it is or how to use it.  New Jersey has its own innocent purchaser defense that requires a property owner to demonstrate that, at the time they acquired the property, they did not know and had no reason to know that any hazardous substance had been discharged at the property, by performing an “all appropriate inquiry” prior to purchase.  The PA provides NJ innocent landowner defense. 

A Phase I Environmental Site Assessment is meant to identify Recognized Environmental Conditions (REC)as defined by the American Society for Testing Materials (ASTM).   A Phase I report will include a comprehensive records review, interviews with knowledgeable parties, noninvasive walking inspection of the property, any data gap identification, an environmental lien search, and a comprehensive historical records review (think a 100 year lookback).

The current ASAT standard for a Phase I is E1527-21 which outlines how to assess the environmental condition of the Property utilizing the All Appropriate Inquiry (AAI). AAI is defined as an inquiry into the previous ownership and use of the Subject Property consistent with good commercial or customary practice as defined by CERCLA 42 U.S.C. §9601(35) (B). According to ASTM E1527-21, non-scope considerations that a consultant may want to assess in connection with commercial real estate and to which no implication is intended as to the relative importance of inquiry into such non-scope considerations consist of: asbestos-containing building materials; radon; lead-based paint; lead-in-drinking water; wetlands’ regulatory compliance; cultural and historic resources; industrial hygiene; health and safety; ecological resources; endangered species; indoor air quality; biological agents; and mold.

A Phase I includes zero testing but may find RECs that require testing.  The Phase I evaluates a property’s environmental condition and assess its potential liability for contamination. 

A Preliminary Assessment follows EPA guidelines not ASTM and is like a Phase I on steroids. The Preliminary Assessment will include an Order of Magnitude Analysis to ensure that previously generated environmental data is compliant with current regulations.  The PAR (Preliminary Assessment Report) is more detailed regarding both research and database research.  The Preliminary Assessment will look at historical manufacturing directories, deeper level of contamination identification, including recommendation(s) should the PA reveal any Areas of Concern (AOC) that require further investigation.  The more extensive environmental evaluation in a Preliminary Assessment entails a search/evaluation of the Site, specific to both current and historic operational and environmental information to determine if there have been any confirmed or potential releases or discharges.  A key part of this is an “Order of Magnitude” evaluation comparing past investigation results to current regulations and standards. Standards change and what may have been acceptable in the past can be out of compliance today.  Past environmental investigations can be found to be lacking and not compliant with today's standards, thus requiring further evaluation.  The additional layer of evaluation helps support a property owners NJ Innocent Purchaser Defense and, in some circumstances, can help acquire funding to remediate sites should contamination be found that was not identified in the report. 

Phase I  Preliminary Assessment Pro Tip 

In New Jersey, if you are opening a daycare or are subject to ISRA,  you need to complete PA, as NJDEP requires a PA not a Phase I.

Important facts about a Phase I vs a Preliminary Assessment

1.   A Phase I ESA is a screening tool to evaluate possible environmental liabilities at a property.   It is strictly lender level ASTM compliant research and data review for financial transactions. The party paying for the Phase I may choose to not investigate(test) any RECs from the Phase I.  A Preliminary Assessment covers state (NJ-specific) liability and is necessary to be in compliance with NJDEP's Technical Requirements for Site Remediation (N.J.A.C. 7:26E)  to obtain protection from potential liability as an innocent landowner (under the NJ Spill Compensation and Control Act N.J.S.A. 58:10-23.11) 

2.  The timing of a Phase I is 2 to 3 weeks.  A Preliminary Assessment takes longer and can  take 20-45 days, due to the additional research involved and you have to wait to receive File Review replies from local and state agencies.

 Can you combine a Phase I & Preliminary Assessment?

Curren has been working on PHIs for over 30 years and this has been a more recent trend in real estate sales.  Curren has been performing PHI/PAR reports for many clients with legal representation in the transaction.   

Phase I or Preliminary Assessment Questions?

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Phase I is the foundation of due diligence when buying a property. Phase I environmental audits are so important for purchasers of commercial real estate. Environmental regulation places the burden of environmental cleanup on a property owner.  If contamination occurred at a property 40 years ago and 5 owners ago, regardless of who owned the property in the past, the current property owner is the Responsible Party for the cleanup. 

Short story, a professional firm, was closed over a weekend.  When employees returned on Monday, they found a 14,000-gallon tank in their parking lot.  The tank was dumped there over the weekend.  This dumping was reported to the police and security cameras caught the entire process, unfortunately, the cameras could not decipher the license plate.  The bottom line the property owner had to pay to properly dispose of the dumped tank. 

That said, how do you know you are getting the best Phase I?

The environmental company should express that the  Phase I can be completed within 3 weeks on average.   Longer time frames would occur if there are government records (environmental reports at the State) that must be reviewed which can take three (3) more weeks to access.  You, as the client, need to be told that Phase I may not be able to be completed as fast as you would like, which many environmental consultants do not want to address.

Quick Story

Environmental company out of Buffalo, NY, did a Phase I at a property in Southern, NJ for an SBA loan.  Timing was mission critical, Phase I report was completed but it had a large data gap, as their recommendation below states:

Recommendations
Additional investigation is warranted to assess the on-site subsurface conditions due to the potential for on-site USTs and long term automotive repair, and should include the area of the floor drain/sump discharge and former in-ground lifts. A review of the 2016 NJDEP Case may help reduce the scope of work. Nevertheless, if investigation identifies a concern, further investigation/remedial work may be required.

Reading between the lines here the consultant knew there were reports with NJDEP but did not review them as they had to complete the Phase I in a short time frame.  Fact, the Phase I was not complete and should not have been issued until the State files were reviewed. Now the consultant wants more money to review files that should have been reviewed as part of the Phase I.  This is very common and wrong on many levels.

Your takeaway should be that you have to be provided realistic time frames to complete the Phase I.

It is estimated 70% of Phase I's require some form of a Phase II.  Now understand that while a Phase I could be classified as white collar, a Phase II will include an aspect of blue-collar work.  Most environmental consultant do not staff people or equipment necessary to perform a Phase II.  Many Phase I customers end up getting hit with the markup from subcontractors that consultants utilize for the Phase I.  You also get wacked with dealing with a 3rd party schedule.

Quick Story

Curren completed a Phase I for a business and property being sold.  Phase I found contamination, buyers bought the site and one of the partners had a friend that worked at another environmental company, that took over the management of the contamination post purchase.  The rub was the friend's company, owned no equipment and subcontracted everything and they had fallen into and out of bankruptcy several years ago and had a long list of vendors they never paid.  Curren Environmental got called back to supply equipment for the investigation and remediation of the site, only Curren couldn't extend credit to the environmental company due to their prior bankruptcy.  The buyer had to pay for all our work which the partners questioned why they switched companies in the first place.  I think their biggest concern was the financial health of the company they hired.

The lesson here is hiring a company that covers tasks of Phase I, II & III, can make your project smoother.

3    Ask the consultant to Predict Your Future

• When you hire a company for environmental you want experience.   The more you know the better you are at evaluating  risk.
• Buying a farm = GPR for tanks, past farmer dumping and pesticide contamination.
• Buying a gas station = former tanks
• Buying a strip mall = any past tenants that could cause contamination?
• Industrial Land = What operated there? Manufacture companies and waste generation.
• Buying land to redevelop = Any off-site contamination concerns that could affect your development
• Known Contaminated Site = what has been done and how viable is owner of value of land vs contamination

If you give us the site address and some prior history, the crystal ball can go to work to prep you for what could be in store for you.    This is often bad news and potential negative issues that could affect the transaction, but topics that you should be aware of during your due diligence.  This may even deter you from proceeding with the purchase.

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Does the owner of the property have to be made aware tanks weep is being performed?

A tank sweep is a form of due diligence, like a home inspection, every seller has to allow inspections, although they don’t have to agree to fix anything.  Every seller should be aware that the buyer is paying for these inspections, so they are aware these items are a concern.  Nobody likes to be surprised by problems, which inspections by nature are looking for.

The owner should be aware we are doing an inspection specific to oil tanks because if we find a tank we want it removed and I was told they have no knowledge of any oil heat.

Do you need to go inside the building during a tank sweep?

100% you have to go inside the building and inspect for evidence of prior oil heat.  Anyone not going inside is doing an incomplete inspection. To provide a thorough tank scan, Curren needs access to the basement heater room during the scan and no cars in the driveway.

An oil burner switch and an oil burner fuse inside the door are both clues that are indicative of oil heat.  Curren also sees "cut outs" in the flooring of the basement, or lines sticking out of the flooring, both are clues that an oil tank was present on the property at some point in time. 
 

Speaking of visual assessment as part of a tank sweep, one of the photos below suggests an oil tank the other is 100% not an oil tank.  The trained technician knows the difference.

What happens if you find an oil tank during a tank sweep?

When a tank is found the owner/seller must be informed of the tank and that it needs to be removed and tested to verify no leaks.  But it goes deeper than that, a cascading series of events occurs.

1. The settlement will need to be pushed back typically a month or more as you need time to get permits, remove the tank and get soil sample results. Example: We just had a tank located and removed prior to the settlement they pushed back settlement twenty days on day fourteen we removed the tank and it leaked, now the leak is reportable to the state environmental agency, and you will have to do reporting to the government, which takes time.   As we waited a week for the test results, the settlement was not moved back any further, three days before settlement we get all the test results 100% failure and soil remediation required. The Realtor, mortgage company, and buyer were like deer in the headlights as there was no backup plan.

2. Find a tank, the seller must address the tank for the buyer or cancel the contract and disclose the tank to all FUTURE BUYERS, meaning updating the Disclosure Statement.  A Realtor must update the listing referencing the tank. Example: had one where we found a tank, the seller canceled the contract, and got a new buyer but NEVER DISCLOSED the tank.   Buyer found tank AFTER PURCHASE.   Man, the number of attorneys and people getting sued was large and the buyer walked away winning.

3. Find a tank, and see if the seller will take care of it because as you have just read, they need to do the right thing.  Buyer can push back settlement until at least the tank is removed and soil sample results are returned, and it can be determined if remediation is or is not required. Example: Had this situation occur, but the tank was found under a deck, buyers paid for soil testing where we could test, and contamination was found.   We found cancer, but the extent was not known because the deck prohibited access to drill test borings.   The buyer and seller came to some financial agreement on the purchase and the buyer got monies back or off the purchase price.   We remove the tank and performed a remediation, but the contamination was extensive, and the buyer needs more money to clean up the leak but the seller is saying they agreed on an amount and no more funds will be provided.

What are appropriate Due Diligence time frames?

One of the most common issues in buying and selling real estate is unrealistic due diligence time frames & settlement dates.  Settlement dates that are set PRIOR to any due diligence being completed is the biggest failure. If you are involved in real estate and the due diligence finds an Area of Concern (AOC) or a Recognized Environmental Condition (REC) 80% of the time the settlement date needs to be pushed back.

Quick example, completed Phase I ESAs for a site in New Jersey and Pennsylvania, both found potential USTs. Both required a geophysical, at one of the sites the property owner of 29 years swore there were no tanks, but they had zero paperwork to support that statement. Fast forward three (3) tanks were found between the two sites. Now you have to get NJDEP & PADEP permits and register the regulated tanks, both sites took about 50 days to get government permits.

Understand that Due Diligence has Many Layers and steps.

Take for example a farm being purchased that required a Phase I ESA, the due diligence period was set for 30 days with settlement on the 31st day.   The concern of the parties was whether the Phase I could be completed in 30 days, 90% of the time it can be, for the record most Phase I's can be completed in 2 weeks, sometimes 3 weeks.    But the real issue is the parties left no time for a Phase II, if required, and most all farms would require some form of a Phase II and that's coming from 30 years of experience.  Even if you tell people testing is likely going to be recommended, no one listens and no one extends the due diligence period, but everyone gets upset when they have to change the settlement date. Sure the seller could have done their own Phase I & II prior to selling the property and saved time and headache, unfortunately, few sellers are that forward thinking.

Let’s say, a property has had remediation completed, and multiple areas on a property were remediated. We just had a site that fits that bill.   A Phase I is still completed to protect the buyer but the Phase I has to review state environmental reports that were submitted, which can take 4 weeks to get copies of reports.  (Fact most owners have incomplete reports or cannot find the reports).   Obtaining records from the government is not quick and yes a one (1) month wait is not uncommon.  The 4-week due diligence period must be extended.  

On the site we just dealt with, which was commercial, it was disclosed that multiple AOCs had been remediated and closed out with the state.  But this site had other areas that were not remediated that warranted testing, multiple, like $42,000 worth of testing.  Granted the property was 10.7 acres, listed for close to 3 million dollars, so it should not be surprising that AOCs existed on the property and were not evaluated by the seller, I mean few people who own real estate want to find a problem. The buyer still wanted to proceed with testing and purchase, and the seller did.  Well, the seller ended the contract, they were concerned problems would be found they would have to address.  Now, did the seller side warn them that this scenario was possible, hard to say but I would venture a guess the answer is no.  Is the seller wise in thinking another buyer will come along to buy the property without testing? They can hope but are unlikely.  The buyer was more than upset that a deal valued in the millions would be stopped in its tracks due to their desire to test and ensure they were not buying a contaminated property.  The buyer also was willing to contribute to some amount of remediation.  

But let’s say the deal kept moving forward and the seller gave another 30 days of due diligence.  The testing could be completed in this 30-day window, but if remediation was warranted, 30 days is not enough.   But the seller says we can price out cleanup and negotiate a price reduction within 30 days.   Still an epic unrealistic situation as Phase II is just evaluating if contamination is present not the extent.  Say three areas out of 14 need remediation (an unrealistic low number but just play it out).    Your next step is to define the 4 areas which could take another 30 days maybe 90 depending on soil and groundwater.   This situation actually played out on another site and the due diligence was 9 and 1/2 months.

Pro Tip

All you bankers, real estate professionals, sellers, buyers, and lawyers listen up.  Ask your environmental professional what they would estimate for a reasonable due diligence, when a Phase I & II may be necessary.  Before you ask do not give them your desired date of settlement, you will likely bias their answer. Although as environmental professionals we are not clairvoyant, we can assess sites from a desk, and utilize experience from other sites we have evaluated many times before to say you may want to budget 60 days or 90 days, if it's less, well then you can settle sooner.  You should also consider if any cost sharing will occur with Phase II between buyer and seller and what the seller's pain point is on paying for remediation.   

For example, the client had a retail strip of stores with historic groundwater contamination. The economical solution was to monitor the groundwater for 8 quarters to show a declining trend and permit the contamination in place.    The 2-year budget was $86,000, which was also the amount the seller was willing to place in escrow after the sale for the buyer to use to pay for the work. But the $86,000 was a budget and could trend higher or lower.   This confused the buyer as well as the fact that there would be costs after the site is signed off that the owner would be responsible for and this is assuming groundwater trends lower. Some sites do not and you need to perform remediation to push levels lower.   This is another situation where all parties were not transparent regarding time frames and costs and what each party was willing to accept.

Last example and let me dumb this down for you.  

A residence had a leaking tank, which was discovered during due diligence.  The future cost of remediation was determined, what was not discussed was the time frame to remediate and when state would review and sign off (typically 2 weeks to 6 weeks to 2 months, depending on your state).     Well at settlement these time frames were discussed and the buyer backed out at the settlement table.  Now the blame on this one was the environmental company not timelining the remediation (parties not asking either).   People went in with blinders on and the deal fell apart.

If your due diligence finds environmental concerns, know that environmental has no drive-through lane, no same-day delivery, heck not even a delivery date.  Like medicine and law, it’s a practice, a somewhat inexact science, but data sets are out there if you are willing to listen.  So rather than say due diligence is 30 days, ask what the consultant thinks is the reasonable time frame.   Play out a couple of scenarios so all parties have an idea of what could happen, plan for the worst, and hope for the best.

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A home inspection is a home education and when is education a bad thing?

Every “As Is” sale is the hope from the seller that a buyer will accept any and all issues with a property, whether owner known or unknown. I mean unless a house is new, you are buying a “used” house and you must accept some wear and tear to be present.   Not performing a home inspection, and no – your Uncle Charlie and your father-in-law do not count as insured inspectors, you are buying property with your eyes wide shut.

Due diligence can include comparison car shopping, dating before you get married, and yes, a professional home inspection of a dwelling and grounds. Considering a home and a boat are typically the largest expenses you will assume, not inspecting will put you at risk of spending money that could have been negotiated prior to purchase. They also say a boat is a hole in the water you pour money into, same can be said for a used home. Couple that with the fact that building codes change, meaning the codes get stricter and more protective, performing a home inspection by a professional knowledgeable on current regulations is critical. Old codes get updated to address safety issues for example. Can you really tell if a house has radon without a test?   What if every fixture in the dwelling is 25 years only? Expect replacement costs, water heater, HVAC, and washer and dryer, which could be $20,000.00 to $30,000.00.   The cost-benefit of having a home inspection is huge. Negligible cost to professionally inspect saves thousands of dollars in repairs. Think structural or unseen termite damage (Uncle Charlie can’t fit in the crawlspace to inspect).

Home inspections also allow a buyer to back out of a purchase.  If expensive defects are found, the seller would be liable to express to future buyers as there have been case law verdicts against sellers when they decide to not disclose known material defects.   Typical contracts allow an out for structural and environmental both of which can run tens of thousands of dollars.   

Although you likely do not want out of any home you have under contract, you also may not want to spend $10,000 to replace the sewer line, which is why inspections allow negotiations to occur. Yes, sewer line scopes are a thing and a huge payback for the minimal cost. We see sewer line replacements at around $10,000, if not more. 

Did you know many people have an Uncle Charlie (or the seller may have an Uncle Bob)? Did you know Uncle Bob and your father-in-law also build things without permits? Illegal additions and improvements not performed to code can cost a buyer real money in the future. We had a site where a tennis court was built and changed the grade of the yard as well as exceeding the maximum allowable impermeable cover for the property.  Finished basements with no permits?   Yep, that is an issue, as inspectors will flag out shoddy work, i.e., work not up to code.

Skip a home inspection and your insurance carrier and mortgage company may balk, because they want to protect their interests. Electrical work not up to code can cause fire and large insurance claims, so when deciding an inspection is not needed for yourself ensure no one else involved in the transaction needs due diligence completed.

Let’s put it in perspective, do no due diligence - you find nothing. Do a sewer line scope maybe you find a break in the mission-critical sewer line. Test for and find radon, and save yourself from getting lung cancer.   Faulty wiring, well maybe the house won’t burn down.

Aside from being an environmental consultant that reviews thousands of environmental reports a year, I also find home inspection and property condition inspection reports across my computer screen.   The list of items you find when you read one of these reports is staggering. Even new homes can have a laundry list of items requiring repair. Of course, new homes get 100% of items addressed, but the point is even new construction can have mistakes and flaws that a professional inspector can find.

Full disclosure, Curren Environmental only does environmental inspections, not home inspections and when we get asked if a home inspection is valuable, Curren says they are invaluable.

In New Jersey or Pennsylvania there is a disclosure list a seller should complete.  Any disclosure is a representation of known facts and are meant to make knowledge about a property available to buyers.  In  New Jersey's there are statutes, the state's courts have carved out rules (under "common law") that are meant to protect buyers against sellers who fail to disclose material facts or who hide information about their property.

The New Jersey Supreme Court, addressed a home sale where the seller failed to mention a cockroach infestation, the courts ruled this oversight as  "silence may be fraudulent." (See Weintraub v. Krobatsch, 64 N.J. 445 (1974).)  So there are court cases where an as is sale and non disclosure spelled bad news for the seller post sale.

It is in your best interest to complete the Sellers Disclosure statement even if it is not required by law.  You must consider that if you were buying a property and no disclosure was completed by the buyer you would question what they may be hiding.  Conversely when you fill out the disclosure, know that it can be considered a legal document.   Withholding facts can create problems later on.   In a perfect world,  sellers would be 100% encompassing on disclosing both the good and bad about a property.

Did you know that if you have your property under contract and the deal falls apart because the buyer found an unknown defect, well that defect is now required to be put on a new disclosure statement.   There is a paper trail that can lead someone who looks for these facts, so honesty is the best policy.

New Jersey has passed laws adding to the disclosure requirements of sellers.  In recent years disclosing awareness of mold water damage and lead in plumbing.   Pertaining to mold or water damage:

◦Yes    No         
[ ]      [ ]               9)        Are you aware of any water leakage, accumulation or 
                                       dampness within the basement or crawl spaces or any 
                                       other areas within any of the structures on the property? 

◦[ ]      [ ]               9a)      Are you aware of the presence of any mold or similar 
                                         natural substance within the basement or crawl spaces 
                                         or any other areas within any of the structures on the 
                                          property? 

Regarding Lead

Bill S-829  signed 11/08/2021 requires property condition disclosure statements to include a question concerning the presence of lead plumbing in residential properties.  For lead this means if the owner had water testing performed for lead it must be disclosed.  

Environmental Disclosure in Residential Real Estate

Informed buyers and sellers should know that asbestos and lead paint were green building products and were banned in the 1970s, so older homes likely have these compounds in the home and the owner likely has never tested for them, they are simple assumed to be present. unless you do a lead paint inspection:   Lead Paint Inspections

The same time frame of pre say 1980's home, oi heat was likely used in the past and the property.  These tanks rust and leak oil costing homeowners Tens of thousands of dollars in environmental cleanup.  Buyers performing due diligence will complete a tank sweep to prevent buying a contaminated property.   Oil Tank Sweep FAQ

Being fair to sellers, many bought a home on natural gas and never did a tank sweep so they may not honestly know if a tank is or was present

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Real Estate Disclosure in an "As Is" sale.

Many sellers want to sell a house "as is." This means that the seller does not intend on making any repairs as part of the sale process.   Generally speaking, "as is" houses are priced lower than market value.

Real estate contracts can have a "as is" clause because the buyer is entitled to inspect and cancel, if warranted, this "as is" clause is often misunderstood by sellers to mean that if the buyer wants the property he has to take it "as is," without any chance to cancel the contract or request repairs from the seller.

The "as is" clause more accurately is a situation where the seller  has no intention of making repairs to the property or even into entering negotiations about repairs. The "as is" clause is accompanied by an inspection clause that permits the buyer to cancel the contract should the buyer's inspections reveal major defects that the buyer is not willing accept the property with.

Major issues could be septic, contamination from an oil tank, mold or structural.  Typically, a dollar amount is put in the contract that will allow the buyer to back out if the cost is above a certain threshold.

Environmental issues in an As Is sale, such as a tank leak tend to bend the seller to address the problem.  The reason an environmental issue can tip the scales in an "As Is" sale is because the cost for cleanup of say $40,000, dings the value of the property and can prevent a mortgage or insurance carrier to get involved.     In theory and as is sale is a wish that s not always granted to sellers.

You can never toss out ethics and even in an as is sale if a seller intentionally misrepresents, fraudulently conceal, or even negligently conceal something unrelated to the failure of inspection, even the "as is" clause might not protect the seller under common law fraud or misrepresentation case. Case in point hiding a underground oil tank on the property could be unwise.    We find many oil tanks on as is sales, even on these sales when the home was flipped, and the flipper was the as is buyer.  Oil Tank Sweeps

Real Estate Disclosure has progressed over the years and many sellers wanting a fast a sale as possible will have their own home inspection performed prior to listing the home for sale.    This allows the seller to contemplate what issues are present and get estimates to undertake these repairs and disclosing what they did and did not do.    These proactive sellers realize they are selling a used home so wear and tear is expected.   In our experience when we deal with buyers who have had sellers do a pre-sale inspection and repair both sides appear to be more at ease, simple due to the fact that both parties want as much transparency as possible.

*Legal representation in any transaction is always prudent no matter if you are selling or buying.

Go to your doctor and no matter how healthy you look, they take tests. Go to the dentist, and you get x-rays.  Regarding environmental issues again you need to test to verify nothing is present.  If you do not test you have a 100% chance of not finding anything.

Environmental Due Diligence is meant to protect a purchaser, commercial due diligence starts with a Phase I and can lead to a Phase II (testing), which while buyers are aware a Phase II is a possibility, it can also find a problem, so why do a Phase II if finding something is not 100% certain?

The map below which is from the 1940's shows an auto sales storefront in a downtown area.  It lists a 550 Gallon Gasoline UST in front of the building.  Today there are retail stores with a coffee lunch spot.  Really zero current evidence of anything automotive or gas tank related.    So, say you want to buy the property.  Do you assume the gas tank is not there anymore?  No, you scan the area by completing a GPR Survey to make sure it's gone and if it's still there you have owner remove the tank.  

How about below, a then and now photo?   Are the tanks still there?  Do you think if the gas tanks leaked, and you owned the property you would be responsible?

What if you find that the tank is gone, well you now take soil samples to make sure there is no residual contamination.   And yes if contamination is found, the property owner owns the problem.

People suspect a building component contains asbestos based on appearance and age of building, but you do not know 100% unless you test.  When you are doing a risk assessment or any other form of environmental due diligence, you would assume the component contains asbestos until proven otherwise.  The same goes for PCB's in an electrical transformer.  Assume it contains PCBs until it is labeled otherwise.   So, while a property owner wants to believe these is no contamination, a buyer can't rely on that belief.  Hence the need for a Phase I and sometimes a Phase II which includes testing.

A case in point an older manufacturing plant (40 years) had a large outdoor compressor.   The compressor at time of sale was only 5 years old, nice and new.   But as an environmental consultant we ask what about the old compressor.  The issue with compressors is they can spit oil and older compressors were known for this.  A REC in the Phase I would be to do a Phase II with soil testing around the 4 sides of the new compressor to look for residual oil from the old compressor.    Yep that is how it works.

We had a group looking to buy a large corner property that had commercial operations in  1930's that could contaminate the property.  The buyers were excited to buy the property.  From decades of experience, we recommended testing prior to purchase.  Their response is below

Thank you for submitting a proposal for our project. As you may know, your company is one of only a few that recommend taking soil samples for analysis.   Obviously, once the analysis is completed, the results would need to be disclosed. Shouldn’t a property owner be concerned that these soil samples might uncover a problem that would need to be addressed further?

Our answer is yes if you find contamination it is reportable and the responsibility of the current owner to pay for.   So there are reasons why a property owner may not want to have a buyer do testing.

If you are buying or selling real estate you need an experienced environmental consultant 0n your side, call the experts

Questions?  Call the experts 888-301-1050

What is Environmental Due Diligence?

Environmental due diligence is the process that evaluates the environmental conditions and risks associated with a property. The process can be at the request of land developers, lenders, attorneys, or private owners who intend to purchase, refinance, or occupy a property.

The rub with performing environmental due diligence in real estate is buyers spend countless hours researching properties to purchase and when the right one is found, no one wants a delay or a cause a problem.

Environmental due diligence is essential for anyone looking to buy a property, whether commercial or residential. Hidden environmental liabilities are a massive problem you can face when purchasing a property that has not been evaluated for environmental due diligence; before making any large real estate transactions, make sure to understand the importance of this process.

When Is Environmental Due Diligence Required?

Lending institutions typically require environmental due diligence before they will finance a real estate purchase, refinance an existing loan, or accept collateral for a construction loan. If a cash buyer is involved, it is up to them to decide if a Phase I or other form of due diligence is necessary.

Who Benefits from Environmental Due Diligence?

Anyone purchasing a property can benefit from environmental due diligence, even if a lending institution is not involved in the sale. The process reduces the chances of someone purchasing real estate inheriting ecological concerns created by the former owners, it also provides an essential legal defense should issues arise.  Buyers get to know if there are environmental issues.  Sellers, although they typically would prefer a buyer not do due diligence, can avoid liability after the sale in the event contamination is found when a Phase I was not performed.  Lastly, lending institutions ensure that their loan is protected from contamination that can diminish the value of the asset.  A million-dollar property with a $400,000 cleanup is not worth 1 million dollars.

How Does Environmental Due Diligence Protect You?

Suppose environmental due diligence is performed before purchasing a property. In that case, the purchaser can gain protection from being held accountable for any pre-existing contaminations on the land according to the Comprehensive Environmental Response, Compensations, and Liability Act provisions. If this process is not completed, the new owner can be held responsible for repairing the contamination.

Buyers can also avoid being hit with the cost of environmental cleanup.   After completing tens of thousands of property transactions, the cleanup of sites is most commonly found when the current owner was lax in performing any environmental due diligence.     There are many properties that are being sold or planned to be sold that have been held by the owner for a number of years and they never did any environmental assessment of the property.  

What Does the Comprehensive Environmental Response, Compensation, and Liability Act (CERLCA) Require?

CERCLA establishes the process of determining who is liable for any hazardous substances on a property. Any property owners who are found to violate environmental due diligence can have to pay fines and fix the issues are their own expense, even if they aren’t responsible for the original contamination. Merely owning a contaminated property is enough to make you liable in the eyes of the law; this is why environmental due diligence is so necessary.

What is common Environmental Due Diligence?

The most common environmental due diligence is performing a Phase I ESA.  Phase I is an investigation into past and current ownership and uses of a property to assess the potential existence of hazardous substances or petroleum contamination on, in, or at a property.  It will even look at neighboring properties to see how they can affect the target property.   A Phase I ESA investigation is purely research and a site visit.  There is no testing during Phase I because you don't know if you have to test a site until Phase I is completed.   

There is a level of service you can expect from Phase I as they must be completed by an “environmental professional”.   The goal of the Phase I ESA is to identify recognized environmental conditions (“RECs”) that may affect the property or trigger liability for the buyer and determine whether further due diligence in regard to the RECs is appropriate.  Further evaluation can be Phase II or Phase III.  More about a Phase II & III can be found here  Phase II,  Phase III

A great resource with questions and answers regarding Phase I's can be found below. 

Phase  I  FAQ

Due Diligence Questions?  Call the Experts

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A 1031 exchange gets its name from Section 1031 of the U.S. Internal Revenue Code, which allows you to avoid paying capital gains taxes when you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties like kind and equal or greater value.

Not dissimilar to the photo below showing the progress of the famous tower, a 1030 Exchange can allow an investor to keep building up a real estate portfolio.   Unfortunately, skilling environmental due diligence on a commercial site can be a costly mistake when remediation is needed.

As a  real estate investor, a 1031 Exchange can allow you to leverage your investment in real estate.  In the environmental due diligence world, we find that 1031 Exchanges tend to skip over environmental due diligence, which places the parties involved at risk.     People need to understand, that the owner of the property =  the RP.  (RP = Responsible Party).  Even in situations where the seller agrees to perform the remediation, we have seen RP's disappear and regulatory agencies will also look toward the owner of the real estate. 

Generally speaking A Phase I Environmental Site Assessment should be performed for all commercial real estate transitions, including 1030 exchanges.    Learn About Phase I

Let's start with the appeal of the 1031 Exchange

First, it allows an investor to pick a new property that allows a greater ROI or diversify the portfolio of properties.

You can use the exchange to consolidate several properties into one asset or vice versa acquiring more properties in exchange for one more valuable one, possible for estate planning.

On an accounting basis, you can reboot the depreciation clock. Meaning rather than simply selling one property and buying another one the 1031 exchange allows you to defer capital gains tax, thus freeing more capital for investment in the replacement property.

That all sounds great right?  Well, the environmental rub is there are time frames for 1030 to execute and we are finding many people have skipped over doing environmental due diligence including Phase I, II & III.   The rub is all Phase I studies follow an outline established by ASTM.  ASTM updates the standard every 8 years.  Generally speaking, when a change occurs Phase I becomes more inclusive.    a Phase I from 20 years ago would be a faster read than one today.  So you can expect that today's Phase I will be more thorough.  

The oil that leaked from this previously sealed pit is now the owner's responsibility to address.

How do you protect yourself with a 1030 Exchange?

Real estate transactions are complicated and 1031 Exchanges add a short window to identify properties, which makes people cut corners.

1. Be savvy and have your environmental consultant evaluate the potential sites.  You can start with a cursory environmental evaluation to find any red flags, you don't always have to do a Phase I.  You can do a Records Search with Risk Assessment (RSRA): Which is where an environmental professional obtains, reviews, and summarizes an ASTM 1527-21 compliant database for the noted property and the surrounding one (1) mile. The review will focus on any pertinent listing for the Subject Property as well as any surrounding properties which could pose a potential Recognized Environmental Concern (REC). The environmental professional will also perform a reconnaissance of the Subject Property. (Access to interior building areas must be granted.).   RSRA's can be converted to Phase I after the decision is made to pursue the property.  RSRA's are helpful if you are evaluating multiple sites but only plan on acquiring one of them.  Now an RSRA is not a substitute for Phase I but rather a way for an investor to evaluate multiple properties without fully committing to Phase I.
2. Of course, you can also perform a Phase I for the target property.   Savvy investors will get the target property owner to share the cost of the Phase I which will allow both buyer and seller to retain rights and use of the report, in case the 1031 Exchange does not go through.
3. You can also have the owner perform the Phase I as a condition of your acquisition.   Hey to be fair, the property is going to need to have a Phase I for any buyer and many sellers contract for the Phase I to help expedite sales, even before the property is listed for sale.   Realtors take note, properties with a completed current Phase I go to settlement faster.  Buyers can always have the Phase I peer reviewed by an environmental professional.  Curren Environmental peer reviews a few hundred Phase I reports every month, so this is not uncommon.
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5. At this point we hope you have a bit more knowledge about Environmental and 1031 Exchanges.  Want to know more?  Call an environmental professional.
   

Pro Tip:  Curren Environmental has been doing Due Diligence for close to three decades (Yea we are old).    When you need a Phase II, well we just pivot and come back to the site with some of our equipment. 90% of other companies call a subcontractor which adds cost and time.

Commercial Due Diligence includes performance of a Phase I ESA

Well how do you perform a Phase I ESA during Covid-19, when government offices are closed or minimally staffed delaying records request and you have settlement in 3 weeks?

Well how do you perform a Phase I ESA during Covid-19, when government offices are closed or minimally staffed -  delaying records request and you have settlement in 3 weeks?  In short you add this known delay into contract as buying real estate during Covid-19 is an unprecedented task.

Lets say you are buying a commercial building in New Jersey during Covid-19 and there are NJDEP (New Jersey Department of Environmental Protection) files that require review.  Of important note if any government environmental agency has records on the property you are purchasing you want those files reviewed.

You do due diligence not just to research current operations but what occurred at the property in the past.

Curren was performing a phase I for just such a situation and here is a quick summary of the obstacle faced with public records and Phase I ESA's.

Open Public Records Act (OPRA) request was  submitted an OPRA records request to the NJDEP on July 1, 2020.

On July 14, 2020 Curren received a response from the NJDEP indicating that due to the COVID-19 restrictions indicting “the NJDEP is not able to fully respond to record requests within the prescribed timeframe under the Open Public Records Act, N.J.S.A.47:1A-1 et seq (OPRA). The NJDEP work force has transitioned to work remotely from home, impacting the NJDEP's ability to access onsite and archived government records, conduct onsite inspections, and copy responsive records. In accordance with N.J.S.A. 47:1A-5(i)(2), which states that the deadlines under OPRA, to grant or deny access to a government record shall not apply if no reasonable efforts are available based on the circumstances, and in maintaining consistency with the social distancing directives of the Governor, the NJDEP is not able to complete the search for responsive records and respond to this request. Once resources allow, the NJDEP will complete and issue the final Government Records Request Form response to this request. We apologize for this inconvenience.”.

On July 13, 2020 the NJDEP submitted a response indicating “At this time, your request is not able to be completed within the statutory time frame specified in OPRA”.

On July 20, 2020, Curren received another response from NJDEP indicating that “Based on this record request, responsive records have been identified and will be emailed to you within 5-business days”.

On August 6, 2020 Curren reached out to the NJDEP requesting information as to the status of the email. In response to this email the NJDEP requested that Curren recontact them if the information was not received by August 18, 2020.

On August 20, 2020, Curren again submitted a request regarding the status of the information and received a reply indicating that we should have the data by Monday August 24.

On August 21, 2020, Curren received an email from the NJDEP with pdf files regarding the site. 

So approximately 7 weeks after a request was submitted the public records were produced.  You can repeat this same story for Phase's performed in Pennsylvania and Delaware, where we have seen similar delays.

If you are buying a commercial property and you are completing a phase I ESA, you need to prepare for longer reporting time frames.

If there one aspect of the economy that has strong forward momentum it is residential and commercial real estate sales.  The boom in real estate transactions (transactions are limited based on availability of properties for sale) are driven by historically low interest rates and the economic blow of Covid-19 on businesses that are driving prices lower and creating a buying opportunity for strategic investors.   In short there are businesses that are closed and real estate is being listed for sale and sold.  This is occurring by both owner operators of property as well as owner/landlords that have lost rental income and are selling the properties. By strategic investors we are referencing a buyers that have near immediate plans for the properties being purchased.  The closure of restaurants and many small business due to Covid-19 has left a dramatically different real estate market

Commercial Due Diligence includes performance of a Phase I ESA.    A Phase I researches current and past operations and diligent inquiries encompass obtaining and reviewing available public records.  Anything submitted to a government agency by nature is subject to review under the Open Public Records Act or OPRA.   Having a Phase I without reviewing OPRA records leaves a gaping data gap in your due diligence.

Expert Due Diligence Advice