Environmental Inspection
When people talk about an environmental inspection it is differentiated between the type of property. Commercial properties will have an environmental inspection consisting of Phase I - Environmental Site Assessment ASTM E1527-21. Lower risk sites can have a Records Search with Risk Assessment (RSRA) which is scaled back version of due diligence (click this link for more information on an RSRA.
Both a Phase I and RSRA is meant to protect the purchasers of real estate. Banks and other financial institutions will require an environmental assessment to protect their financial interests in real estate. In short, the bank wants you to pay a mortgage and expensive environmental cleanup can make borrowers default on a loan, leaving the bank to take back the property which is now known to be contaminated. Not an asset a bank wants to have on their books.
For example the photo below shows past and prior views of a downtown property. The gas pumps were connected to gasoline tanks. If these tanks leaked and contamination was not cleaned up, well the responsibility and cost belong to the owner. The rub is many purchasers of real estate do not recognize environmental risk with real estate and in this scenario naive buyer would assume a downtown property hold no environmental risk.
Both commercial & residential sites can have physical inspections aside from historical research which can include tank sweeps, mold and lead paint inspections.
When you are purchasing a commercial property, you need to perform your due diligence on environmental issues that could exist on the property. How the property looks and operates today is likely not the same as when it was first developed. The photo below shows an old retail gas station many pump islands in a very long row, no canopy and oh gas at $00.19/gallon.
Fact: when you buy a property you also buy any environmental issues known or unknown.
You do Due Diligence because how the property is today is not how it was years ago. Thorough Due Diligence begins with the performance of a Phase I Environmental Site Assessment (ESA). Most Phase I’s can be completed in approximately 2 to 3 weeks. Longer time frames can occur when there are State files for the site. These are typically present if an environmental permit or contamination occurred at the site and documents have been submitted to the state. Clearly, these files if present must be reviewed as part of the environmental assessment.
How long does it take to complete Due Diligence?
On average 2 to 3 weeks, but longer time frames to complete the due diligence will occur if State files are available and this is directly correlated to when the State can allow access to said files. In short, if there are 5000 pages of documents at an environment office relating to the property, we want to review them and if we have to wait 4 weeks to do so, that adds to the time frame.
Pro Tip: If you hire someone to do Phase I, they should express how quick AND how long the report can take. So often the client is not informed about likely delays. You should also ask what would make the Due Diligence take longer, as we just explained there are plausible and possible reasons. All too often an environmental consultant will not supply the downside.
Another potential delay is the Knowledgeable Party Interview, believe it or not, owners dodge our interviews and questionnaires.
Phase I also includes interviews with owners and operators, if there is a delay in speaking with these parties the report completion may be delayed. It is not uncommon that the owner of a property for 30 years is not available for an interview, and you get presented with an employee who has limited knowledge of the property which clearly is not optimal for a thorough Phase I.
Aside from interviews and historical research a Phase I environmental inspection includes a walking inspection of the property. The photo below is from a multiple-story building (1st floor retail, 2nd & 3rd-floor apartments). The rear of the property did the auto repair and apparently housed a buried gas tank. Guaranteed the buyers untrained eye walking the property would NOT see or suspect a gas tank was on the site, hence the value of Phase I.
Sometimes people selling a property will do Phase I, to address any issues before a buyer is found. This is not 100% common, but it does happen, and it saves a lot of time. The typical commercial property has no Phase I, likely not even one when the current owner bought it. Hence the need for buyer due diligence.
Does the photo below look like a $22,000 problem? It was.
We see too many legacy property owners who want to sell and retire and when a Phase I is performed, it leads to phase II, which is testing that finds contamination and the owner is stuck with cleanup. Recent scenarios have run $42,000 and over $100,000. The cost of environmental cleanup cannot be underestimated.
While a Phase I is typically voluntary (unless the bank requires it), the cost to do the Phase I Environmental Inspection should be in your budget. Remember that Phase I is designed to identify recognized environmental conditions (REC) in connection with a property.
What is the downside of not doing Phase I?
You buy a property with environmental issues and spend tens if not hundreds of thousands of dollars to remediate.
We have over 30 years of experience performing Phase I Environmental Inspections and we also own the equipment necessary when a Phase II is needed, which is more often than people realize.
Pro Tip: 90% of the companies doing Phase I inspections sub-contract out the Phase II work and that is where costs can add up, even before remediation.
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