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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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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

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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). 

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). 

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. 

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.

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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You break it you buy it.  Look before you leap.  You only have yourself to blame.  All common phrases.  Well environmental due diligence, i.e., a Phase I Environmental Site Assessment is an insurance policy of sorts that protects buyers of commercial properties.  Phase I is a historical and current assessment of a property for environmental issues (read costs to remediate contamination on a property).   But there are two "rubs" when doing a Phase I.  First, no buyer wants to find a problem with the property they are buying (trust me, I have heard clients say they hope we don't find anything countless times).  I call these people Hand Stampers because they want to get stamped that they did a Phase I and nothing was found, I call it unrealistic.   Do you think testing was required in the below photo?  The answer is yes.

The second rub of Phase I is that some 80% of the time, a Phase I is needed, apartment buildings much lower percent.   When Phase II testing is necessary the buyers are surprised by Phase II cost and the cost disparities (when they have time to price shop).  The rub is that a Phase I is 100% office work, a Phase II requires that same Phase I person, but now you are dealing with the environmental trades that 90% of environmental consultants subcontract out.  These Phase II services include Geophysical Surveys,  (GPR), and drilling (that's how you collect soil and groundwater samples). and perhaps excavation for test pits or removal of contamination (which technically is Phase III).   

All these services get marked up by the consultant.  You have to understand that consultants have insurance and workers comp that lists them as clerical, which is a very inexpensive insurance rating, most can't even use a shovel or it can place their personnel into a different workers comp rating which is more expensive.   So most all consultants subcontract services and markup the subcontractor, who does the heavy lifting so to speak.

We were asked to quote a Phase II for a buyer.   Our Phase II  cost was $3,500.00 and basically involved investigating locations where tanks were removed without testing.  The company that did the Phase I quoted the Phase II at  $7,800.00  the $4,300.00 difference represents the consultant's markup and recouping expenses from doing a discounted Phase I, Curren sees this discrepancy all the time.  Our client asked why the price differential, which I just explained to you and they said we should let more people know,  hence why you are reading this article.

Now, why would I want to let you know that consultants discount Phase I's knowing they will make it up on the Phase II work.   Well our recent client, who now has hired us for another property they are purchasing (Phase I), said we should.     

Curren Environmental could be considered a boutique or full-service company as we do the consulting and the environmental contracting (heavy lifting).   We find clients like being able to deal with one company and of course the financial savings.

Do you have Phase II Questions?

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