Hot Environmental Topics

Why environmental testing is Important?   aka do I need a Phase II?

Mar 13, 2023 10:18:00 AM / by David C Sulock posted in Phase I, AAI All Appropriate Inquiries, Due Diligence, Phase II, Phase I ESA, Phase II GPR, 1031 Exchange, ASTM E1527-21

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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.  

Phase II ESA

 

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?

Phase II Testing

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.

Phase II Subsurface soil samplingWhy environmental testing is Important?

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.Phase II is 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

 

Why environmental testing is Important?

 

 

 

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Environmental Due Diligence in Commercial Real Estate Transactions

Mar 8, 2023 10:09:20 AM / by David C Sulock posted in Phase I, Property Transaction Screens, AAI All Appropriate Inquiries, Phase II, Phase I ESA, Phase II GPR, 1031 Exchange, ASTM E1527-21

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There are inherent risks in life and in particular when you purchase something.   Warranties on products including cars are meant to balance the risk.  But when you buy a commercial property, you are buying more than the land and any improvements, you are buying any environmental issues past or present unless specified otherwise.  (There are sites that have government permitted contamination, that is a restriction on the property for sure. but it is s defined environmental liability). 

 

Environmental Due Diligence in Commercial Real Estate

 

I am referring to the purchase of a property that has undiscovered environmental issues.  How you avoid buying a contaminated property is by performing Due Diligence such as a Phase I Environmental Site Assessment.  More about Phase I ESA Click Here.

 

As this article states when should you be concerned about environmental issues on a commercial property?

The safe answer is on every commercial property that you have not completed your own due diligence.

Yes, that downtown property you want to buy may have been an auto garage, dry cleaner, part of a rail spur, I've seen tanneries (Tanneries are where animal hides are tanned, and the wastes generated from tanneries are considered a pollutant to the environment and has potential to pollute both soil and water because of the use toxic chemical constituents in the tanning process)

environmental issues with commercial properties

The rub of downtown areas is they were the center of commerce, which can cause pollution long before environmental regulations became the norm.   Buying close to a rail line?  Well rail roads caused contamination and land was often built up with historic fill.  (Historic Fill material was commonly used to raise the topographic elevation of properties.    The fill material is composed of non-indigenous material… which may have been contaminated prior to emplacement and is in no way connected with the operations at the location of emplacement and which includes, without limitation, construction debris, dredge spoils, incinerator residue, demolition debris, fly ash, or non-hazardous solid waste). Because of the nature of its composition, historic fill material is a widespread concern for many property owners and potential property purchasers.    In short, the property can have at the time of placement legal contamination, which today is no longer legal.

Yes, none of this is fair.  There are other warning signs when you buy a commercial property even when you perform due diligence, I will run down a couple of items buyers should be concerned about.

 

1.  A Phase I includes interview and questionnaire with the owner who is typically the most knowledgeable party.    When this can't be accomplished you have important data gaps, which may be intentional on part of the seller.

 

2.   The owner has no prior environmental reports, meaning they didn't do their own Phase I or will not supply their report.  Want to know why an owner may not want to be interviewed for a Phase I, their lack of due diligence can be a driver.  

 

The historical map below shows auto sales at a downtown property, and it also lists 550 gallon gasoline tank in the street.  That tank and contamination belongs to the property and will only be known if you do due diligence. 

Commercial property environmental study

3.  The Phase I leads to a Phase II, which is testing and can absolutely open up a can of proverbial worms.  If you test you have a chance of finding a problem.  No testing?  Well 100% chance of finding nothing.  But the rub is when the owner denies or limits testing.  For example, we had a site where both soil and groundwater testing were warranted.  The owner did not want groundwater tested because the property had municipal water.  Groundwater is typically the 1st water bearing zone on a property, a good average is 16' to 20' deep.  You are not drinking this water ever, but if this water is contaminated, well it belongs to the owner.   My point being sellers will come up with some nugget of reason why we do not need to test, which is irrelevant in the context of environmental due diligence.

 

Phase I Due Diligence

 

4.   Owner provides reason why due diligence is irrelevant (remember buyer pays for the work not the seller).  Case in point client buying a former appliance store, which was a former laundromat.   Seller wanted no testing because refrigerators and microwaves are not an issue and a laundromat, well that's just dirty cloths.  Fast forward we test groundwater water and find dry cleaning solvents.  Conclusion, the laundromat did dry cleaning.  Saved our client $165,000.

 

Commercial Property Purchase Pro Tips

Start your due diligence and do not consider Due Diligence to be a hand stamp, because if you find an issue it will take time address it.

Understand that your proposed settlement date was likely set PRIOR to performing Due Diligence.  When Due Diligence finds an issue settlement could be pushed back weeks, months even years. 

 

 

 

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Phase I ESA

 

 

 

 

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Environmental Due Diligence

Jan 17, 2023 7:15:00 AM / by David C Sulock posted in Phase I, Environmental Site Assessment, Due Diligence, Phase I ESA, ASTM E1527-21

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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.

Environmental Due Diligence

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.  

Environmental Due Diligence

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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Due Diligence Questions

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Environmental Liability & 1031 Exchange

Aug 23, 2022 1:53:00 PM / by david sulock posted in Phase I, Due Diligence, 1031 Exchange, ASTM E1527-21

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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.

Phase I and 1030 Exchange

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

 

Phase I Due Diligence

 

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.

 

Oil pit

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.
  4.  
  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.
    Call Curren Today

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.

Environmental Liability & 1031 Exchange

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Phase I Due Diligence during Covid-19

Sep 10, 2020 8:15:00 AM / by David C Sulock posted in Phase I, Due Diligence, Phase I ESA

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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?

Phase I ESA during Covid-19

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.

Covid-19 Phase I ESA

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.

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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

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                       Environmental Due Diligence

Jan 22, 2018 2:40:50 PM / by David C Sulock posted in Phase I, Due Diligence, Phase II

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If you are purchasing a commercial property, you will be advised to perform reasonable due diligence prior to acquisition.  The standard is performing an ASTM Phase I Environmental Site Assessment (ESA).     A Phase I incorporates research of a site for the determination of past (historical) or current Recognized Environmental Conditions (RECs) that could affect the value of the property.  Banks typically will require a Phase I for high-risk sites or when loan amounts reach a certain threshold.  Banks typically have buyers pay for a Phase I to protect the bank, as the bank does not want to have a mortgagee be burdened with undue environmental remediation expenses that could in turn affect their ability to pay the mortgage.
Commercial due diligence.jpg

 Any purchaser of commercial real estate is performing Phase I due diligence to protect their interest, not is once again not typically fulfilling a requirement of the law.  Due diligence is a prudent practice to follow for any commercial purchaser.   Many buyers contact our office with little to no real knowledge of what a Phase I is and are being directed to perform one by their attorney or realtor.  Many people view a Phase I as getting their hand stamped and the quicker the better so the transaction can go to settlement.  The due diligence aspect is many times an afterthought.

We are going to cover the different scenarios when a Phase I is completed and when a Phase II or III is triggered and why that is a good thing.

tank buried under building.jpg

The best possible outcome for all parties after completing a Phase I, in the eyes of a buyer or seller is that the Phase I finds no issues with the site and accordingly there are no recommendations that any additional work is required such as a Phase II or Phase III.   This is not as common an outcome as many people think or expect.  Sellers do not want you to complete a Phase I as it delays the settlement and opens up the possibility that the Phase I may find an issue.   Buyers do not want a Phase I performed for the same reasons, citing the time it took to find the perfect site at the right price as well as monies already spent to date.  The Phase I is viewed as a necessary evil and one that at best could cost money and delay the sale from 2 to 6 weeks and at worst strike a crushing blow to the sale when a problem is uncovered that the owner was unaware of and unable or unwilling to address.

The odds that the Phase I will come back clean, meaning no RECs are found, is based on numerous factors including the date of site development and historical usage of the site.  We have found that some of the most innocuous appearing sites (upholstery and insurance office), have been found to have potential environmental concerns from PRIOR usage.

Picture 014.jpg

A common Phase I situation is a client that is not required to perform a Phase I by the bank either because the loan amount is not triggering it or they are paying cash or there is a 1031 exchange.  These are rush hand stamped Phase I’s as there are already planned deadlines and the Phase I request is coming from the buyers attorney.  The rush part of the Phase I need is not based on anything pertinent relative to environmental conditions, but rather business or financial needs.   This is where hand stamping is most common.   Timing is relative and the sooner a decision is made on performing the Phase I the faster it will be completed.  In a perfect world a Phase I would be initiated by the seller prior to listing the property for sale.  In practice, it is one of the last things a buyer completes.

Time necessary to complete a Phase I varies.  Most Phase I’s are completed within three weeks, some can take as long as 6 to 8 weeks.  The difference in timing is based on the presence of records at the State and local levels.  The presence of files for a site at an environmental agency is typically unknown until a Phase I is initiated and the agencies are contacted regarding any files.  If files are found, the review of reasonably ascertainable files is required.  There could be a multiple week wait to get access to these files as they may be in storage or the first available date the State gives is 4 weeks away.   The time to access environmental files at a State level is the under looked aspect of a Phase I.  The determination that no files exist allows the Phase I process to be expedited.  The presence of environmentally-associated records indicates that investigation/remediation work may have been initiated or completed.  Records must be reviewed by a person with the experience and knowledge of applicable regulations to confirm that investigations/remediation has been completed in accordance with the local, State and Federal regulations.  A recent Phase I had pertinent files that were at the State.  Based on ability to accumulate the records and schedule the first available review date, it took five weeks to just perform a cursory review.  The review found that the site was formerly a gas station and had gas tanks removed and properly closed though the State.  What the file review did not indicate was the presence of other tanks on the site that appeared to have been either removed or left in place.  The unknown tanks consisted of a heating oil, waste oil and kerosene tank.   This triggered the need for a Ground Penetrating Radar (GPR) survey of the site to search for the possible missing tanks.  In this case, the buyer was sure that all the tanks were removed and signed off by the State, unfortunately that was not the case.  In this case, the buyer did not buy the site and the owner had more work to complete including the removal of the tanks.

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When you start a Phase I, anticipate that a Phase II may be the necessary.  A Phase II is testing or further invasive evaluation of a suspected environmental concern.   Another Phase I performed found the need to complete soil borings on the site in areas where the operations of the site may have allowed historical seepage of oils and chemicals into the soil.  The Phase II did indeed find contamination in all the borings completed.   At this point the purchaser was into the property for over 20K, which including attorney’s fees, zoning applications, engineering and environmental.  The next step after finding an area of contamination is to determine the extent of contamination and the associated costs for remediation.  This added weeks upon weeks to the financial deal which could lead to the potential purchaser to look for another property weighed against the monies spent to date.  Most contracts allow the buyer or seller to back out of the transaction if repair expenses exceed a dollar amount or a time limit.   Usually at this point the buyer, thinking they were buying a clean site, is upset about monies thrown down the drain and when the end will occur.   Rarely does the purchaser weigh the fact that the Phase I did exactly what it was designed to do which is evaluate for potential environmental issues that could devalue the site.   Slightly less than $100,000.00, later and almost 7 months from the start of the Phase I was the property cleaned up.  The buyer dodged a remediation expense that surely would have been in their lap if the property was bought without a Phase I as the party they sell too would most likely not be as foolish to purchase without performing Due Diligence.

The photo below is a drum storage area, the floor below the wood was heavily stained.  It was flagged in the Phase I as an AOC and testing was recommended and the testing found contamination.

IMG_6363.jpg

 

Phase I cost sharing.  Due to the unexpected outcome of any Phase I’s in some instances the expense of the Phase I is shared between buyers and sellers.  The advantage for both parties it not just financial (50/50 split), but ownership of the report.  If the transaction falls apart for reasons other than environmental finds issues, the owner has possession of the report and can share same with the next prospective purchaser.

tank removal.jpg

Phase II cost sharing is more complicated.  The Phase II by definition involves physical examinations and in many cases testing.  Phases II expenses can dwarf the cost of a Phase II and due to the potential of finding an issue, many sellers would prefer the testing not be performed.  This is particularly common when the issues being investigated relate to potential conditions that predate the current owner.  This is a very common situation if the current owner purchased the site in the last 20 years and did not perform a Phase I.  Cost sharing is again valuable as the owner has rights to the report and data generated by the Phase II.   In most cases if the Phase II finds an issue that must be addressed or remediated (Phase III) the phase II has to be shared with the owner to document the findings.   Phase I cost sharing is far more common than in Phase II situation.

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Why Perform a Phase I Environmental Assessment Review?

Apr 8, 2016 11:00:00 AM / by David C Sulock posted in Phase I

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Who Requires A

Phase I Environmental Site Assessment (ESA)?

 

In short the Phase I is a historical and walking inspection of a property for environmental hazards or as we call them AOCs (Areas of Concern).  Like the pit and piping in the photo below which held oil.  Did the oil leak into the soils and groundwater?  A Phase I would tag this as an AOC and a Phase Ii would be recommended.

 

what is a Phase I ReportPhase I

Why perform a Phase I? Why do a Phase I ESA

Who Requires A Phase I Environmental Site Assessment (ESA)?

Traditionally, a Phase I Environmental Site Assessment (ESA) was contracted by the bank or lending institution on properties where financing was being arranged.  The Phase I was primarily performed for the protection of the banks, who were concerned that if they loaned money for a contaminated property they may be held liable for the site cleanup.   This belief was incorrect as banks have liability protection on loans.   Today, many banks with loans under a million dollars and borrowers supplying a down payment do not require a Phase I.  This has been an industry shift over the past several years as banks have come to understand where their limit of liability stands.    The real liability is financially for the bank, as they are concerned that the cost of environmental work can hinder the borrower from paying the mortgage and defaulting.  Leaving the bank to own the asset.   Banks want to loan money and receive mortgage payments not foreclose on bad loans.

What is included in a Phase I?

The Phase I is a property assessment that includes a walkover of the property and associated structures; a review of historic property information including maps, aerial photographs, deeds, telephone or address directories, etc.; a review of contaminated properties in the vicinity of the subject property; a summary of knowledgeable party information and review of prior reports; and the review of local, State and Federal files pertaining to the property address.

Items evaluated in the Phase I report include tanks, drains, pits, spills, in-ground and aboveground equipment, petroleum and chemical use, and environmental liens.

The Phase I report is typically research only.  Unless otherwise specified as part of the scope of work, testing or surveys are outside of the typical Phase I requirements. For more information on Phase I click here. 

Why complete a Phase I if my bank does not require one?

Although many banks are not requiring a Phase I on some commercial loans (under a million or low risk), the environmental regulations leave the burden of environmental responsibility on the property owner.  Performing a Phase I, allows a purchaser to complete the necessary due diligence.  This due diligence enables a purchaser to obtain prior to taking possession of a property.  Buyer beware is relevant now more than ever in commercial real estate transactions.  If a property is purchased without a due diligence and future evaluation and subsequent environmental issues are found in association with the property, the property owner is now burdened with the cost of remediating the issue. The performance of a pre-purchase Phase I could alleviate the potential for finding environmental issues in the future and thereby holding up future transactions.  As a potential purchaser, the determination of environmental issues on a property could be used as leverage for the seller to remediate the concern prior to purchase or could be used to negotiate the property value pending the need for the potential purchaser to perform the cleanup.

Phase I, II, III Questions? Click Here

If I do not do a Phase I and buy a property how would I ever find out if there was an environmental problem with the site?

The most common way is when you go to sell and the potential buyer completes a Phase I and discovers an environmental Area of Concern (AOC).   Today the largest purchaser of Phase I’s is not the banks, but commercial real estate investors and owners (*transactions under $1,000,000.00).

I own a property, never had a Phase I and I am now thinking of selling the property.  Do property owners have Phase I’s performed?

Phase I study

One of the largest shifts in the commercial real estate market today is that many landowners are having a Phase I performed to root out environmental issues before they become an issue when a buyer is found.   An owner performed Phase I is viewed as both a marketing tool and an environmental property assessment that can help sellers anticipate issues with a property.  It can be akin to a homeowner having a home inspection completed to address issues that a purchaser might find during their inspection. 

If an environmental issue is found in a Phase I report on a property I am buying, can I still purchase the property?

If the issue is fully disclosed to the lender (if one is involved) and the buyer is willing to accept the liability and cost of addressing the issue, then yes you can buy the property.  However, the real question is should I address the issue before buying the property?

The investigation of potential issues found in the Phase I is typically addressed as part of a Phase II Environmental Site Assessment.

Curren has completed tens of thousands of Phase I, II & II projects and we have been doing it for close to 30 years.  We do all work with company personnel and we own the equipment to do both Phase II and II work.

 

Call the experts   888-301-1050

 

 

What does a Phase I do?

 

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All Appropriate Inquiries Innocent Landowner Defense

Feb 16, 2016 3:54:12 PM / by David C Sulock posted in Phase I, AAI All Appropriate Inquiries

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Due Diligence and the Innocent Landowner Defense

 

The experienced and well informed know that due diligence is an important and common practice when purchasing real estate.  The advantage of due diligence and conversely not performing due diligence can best be compared to the saying "you break it, you buy it".  In real estate terms if you buy a property that has an environmental issue (broken) that you were not aware of prior to purchase, you own it and the issue is yours to pay for no matter the cost or value of the real estate.

For example a couple received an inheritance from a relative, the money's were substantial enough for the couple to realize a dream of buying and operating an automotive garage.  This dream was achieved by buying a garage cash from a fellow who was retiring.  They were able to buy the land and tools for approximately $100,000.00. (As a side note the lower the value of the property, the more risk there is that an environmental issue can be a large percentage of the property price. I say this as time and again prospective buyers defer a Phase I as the purchase price is low).   They used an attorney for the paperwork, but no bank was involved.  While the attorney advised of performing a Phase I, the buyers were not concerned and did not want to derail the deal for something they saw as a waste of time and money.   Couple buys property, run the garage for three years and then husband develops health concerns limiting physical activity such as working on cars.  Couple list property for sale, potential buyer finds property and decides to buy it.  Buyer goes to bank, as he is not able to pay cash as the current owner did.  Bank does phase I, finds issues leading to a phase II. Phase II finds oils in ground from garage operations. Buyer requires owner to remediate, owners say not their problem and are selling as is.  

Deal falls through, owner now paying money from retirement to cleanup the problem.  Buyer is gone, garage is closed and owners are spending 50% of what they paid to cleanup the site. 

Can the owners claim an innocent landowner defense?  

No, the innocent landowner defense is based upon a party purchasing a property and having no knowledge of contamination at time of purchase. A buyer must perform an all appropriate inquiries (AAI) prior to purchase to begin to have this defense.

 

What does an All Appropriate Inquiries (AAI) inquiry entail?

Completion of a Phase I ESA as per

  1. All Appropriate Inquiries

“All appropriate inquiries” refers to the process of evaluating a property’s environmental conditions and assessing potential liability for contamination either past or present.  This applies to any party seeking to assert protection from CERCLA liability as an innocent landowner, or a bona fide prospective purchaser, or a contiguous property owner. 

In 2002 Brownfields Amendments were set forth requiring the EPA to establish regulations establishing standards and practices for conducting all appropriate inquiries. These practices were meant to include research into the previous ownership and uses of a property necessary to qualify for certain landowner liability protections. 

November 1, 2005, the EPA published in the Federal Register its final rule entitled “Standards and Practices for All Appropriate Inquiries,” in which it declared that the American Society for Testing and Materials (“ASTM”) E1527-05 standard, entitled “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process,” can be used to comply with the provisions of the rule.  The standards and practices constituting “all appropriate inquiries” are set forth in 40 C.F.R. Part 312.

 

Get answers to Phase I Questions

What is included in the All Appropriate Inquiries?

  1. Must be conducted or updated within one year of acquiring ownership of a property. 
  2. Interviews with past and present owners, operators, and occupants, the review of government records, visual site inspections, and searches for environmental cleanup liens, must be conducted or updated within 180 days prior to acquiring ownership of the property.
  3. An environmental professional must conduct or oversee the conduct of activities required by the all-appropriate inquiry rule. 
  4. The environmental professional must conduct the following inquiry activities:
  • Interviews with past and present owners, operators, and occupants of the facility for the purpose of gathering information regarding the potential for contamination at the facility;
  • Reviews of historical sources, such as chain of title documents, aerial photographs, building department records, and land use records, to determine previous uses and occupancies of the real property since the property was first developed;
  • Reviews of Federal, State, and local government records, waste disposal records, underground storage tank records, and hazardous waste handling, generation, treatment, disposal, and spill records, concerning contamination at or near the facility;
  • Walking inspections of the site and of adjoining properties;
  • Assessments of commonly known or reasonably ascertainable information about the property; and
  • Assessments of the degree of obviousness of the presence or likely presence of contamination at the property, and the ability to detect the contamination by appropriate inspection.
  • 5 Searches for recorded environmental cleanup liens against the site that are filed under Federal, State, or local law.
  1. Assessments of specialized knowledge or experience on the part of the prospective landowner.
  2. The relationship of the purchase price to the value of the property, if the property was not contaminated.

An innocent landowner defense also extends to the operation and maintenance of the site after purchase. Once the property is owned the new owner must take reasonable steps to stop any continuing release, prevent any future release, and prevent or limit human, environmental, or natural resource exposure to any previously released hazardous substances. The owner must also cooperate, provide assistance, and allow access to persons to conduct response actions or natural resource restoration at the site. Owners must maintain any and all land use restrictions and not degrade the effectiveness of institutional controls.

Additional responsibilities cover cooperating with requests and administrative subpoenas concerning the facility and follow through with all legally required notices (public notification and government) regarding the discovery or release of any hazardous substances at the facility.

Lastly to comply with AAI, the purchaser cannot be associated/affiliated with any other potentially responsible party through any direct or indirect familial relationship, or any contractual, corporate, or financial relationship (excluding relationships created by instruments conveying or financing title or by contracts for the sale of goods or services).

Bottom line the new owner has to be able to prove that the environmental contamination damages were caused by a third party with whom the new owner does not have an employment, agency, or contractual relationship, as defined in 42 U.S.C. § 9601(35).

Buyers beware and perform your due diligence so you know before you buy?

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Why perform a Phase I Environmental Site Assessment

May 4, 2011 10:42:00 AM / by david sulock posted in Phase I, Environmental Site Assessment, ASTM 1527-05, Property Transaction Screens

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Who requires a Phase I ESA?

Traditionally, a Phase I was contracted by the bank or lending institution on properties where financing was being arranged.  The Phase I was primarily  performed for the protection of the banks, who were concerned that if they loaned money for a contaminated property they may be held liable for the site cleanup.  Today, many banks with loans under a million dollars and borrowers supplying a down payment do not require a Phase I.  This has been an industry shift over the past several years as banks have come to understand where their limit of liability stands.

Cost for a Phase I ESA

Phase I Environmental

 

 

What is included in a Phase I?

The Phase I is a property assessment that includes a walkover of the property and associated structures; a review of historic property information including maps, aerial photographs, deeds, telephone or address directories, etc.; a review of contaminated properties in the vicinity of the subject property; a summary of knowledgeable party information and review of prior reports; and the review of local, State and Federal files pertaining to the property address.

Items evaluated in the Phase I report include: tanks, drains, pits, spills, in-ground and aboveground equipment, petroleum and chemical use, and environmental liens.

Additional issues which may be included in the Phase I at the lenders or clients request include: wetlands, radon, asbestos, lead-based paint, and drinking water. 

The Phase I report is typically research only.  Unless otherwise specified as part of the scope of work, testing or surveys are outside of the typical Phase I requirements.

Why complete a Phase I if my bank does not require one?

Although many banks are not requiring a Phase I on some commercial loans, the environmental regulations leave the burden of environmental responsibility on the property owner.  Performing a Phase I, allows a purchaser to complete the necessary due diligence.  It is this due diligence that enables a purchaser to obtain prior to taking possession of a property.  Buyer beware is relevant now more than ever in commercial real estate transactions.  If a property is purchased without a due diligence evaluation and subsequent environmental issues are found in association with the property, the property owner is now burdened with the cost of remediating the issue. The performance of a pre-purchase Phase I could alleviate the potential for finding environmental issues in the future and thereby holding up future transactions.  As a potential purchaser, the determination of environmental issues on a property could be used as leverage for the seller to remediate the concern prior to purchase or could be used to negotiate the property value pending the need for the potential purchaser to perform the cleanup.

If I don’t do a Phase I and buy a property how would I ever find out if there was an environmental problem with the site?

The most common way is when you go to sell and the potential buyer completes a Phase I and discovers an environmental Area of Concern (AOC).   Today the largest purchaser of Phase I’s is not the banks, but commercial real estate investors and owners (*transactions under $1,000,000.00).

I own a property, never had a Phase I and I am now thinking of selling the property.  Do property owners have Phase I’s performed?

One of the largest shifts in the commercial real estate market today is that many land owners are having a Phase I performed to root out environmental issues before they become an issue when a buyer is found.   A buyer performed Phase I is viewed as both a marketing tool and an environmental property assessment that can help sellers anticipate issues with a property.  It can be akin to a homeowner having a home inspection completed to address issues that a purchaser might find during their inspection. 

If an environmental issue is found in a Phase I report on a property I am buying, can I still purchase the property?

 If the issue is fully disclosed to the lender (if one is involved) and the buyer is wiling to accept the liability and cost of addressing the issue, then yes you can buy the property.  But the real question is should I address the issue before buying the property?

The investigation of potential issues found in the Phase I is typically addressed as part of a Phase II Environmental Site Assessment.

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