Everyone needs to start somewhere. Commercial investors are no different. Sometimes a commercial building is bought by a business owner because they need it for operations. Other times the commercial investors are buying the property to become a landlord. The building is inventory for potential renters.
What do commercial investors need to know?
If your name isn’t on the environmental report, you aren’t protected.
Phase 1 Environmental Reports offer a limitation to the environmental liability of the person or entity who purchased it. However, when commercial properties are being bought there’s a lot to remember. Often, the bank will purchase a Phase 1 ESA in the process of making a commercial loan. If the bank signs the contract with an environmental consultant, the bank is the only party that is covered by the terms of the contract. In the terms of the contract, you will find a clause that talks about who can “rely” on the findings of the environmental report. That clause will say the only party that can rely on the report is whoever paid for it.
Now you’re thinking, “I paid the bank, the bank paid the environmental consultant.”
Eh, not really. The bank paid the environmental company, the bank signed the contract, the bank is the only party that’s bound by the terms or protected by the errors and omissions insurance.
Essentially, if the environmental consultant screws up, the bank is the only party that has contractual recourse.
Bottom line, make sure the environmental report has your name on it as well as the bank’s if need be. That way, you have recourse should things go sideways.
Make the seller pay for your Phase 1 ESA.
You should negotiate with a seller in a commercial real estate transaction to have them pay for the environmental due diligence. This happens all the time and offloads a good $2000 in closing costs on the seller. It’s not just about the money. Sales contracts fall apart all the time. I’d say maybe 10% fall apart after the contract but before the closing table. If you’re one of the unlucky 10%, do you really want to be the person who dropped $2000 on a commercial property you will never own?
The seller NEEDS to prove they have a clean property to sell it. Make them pay for it so at least they can keep the report in the event your sale implodes.
Speaking of which, if your sale does fall apart, don’t let the seller have a copy of the Phase 1 ESA. They can’t rely on it anyway. If there are issues, just give them the executive summary.
There are less expensive options than a Phase 1 ESA.
Phase 1 ESAs are the gold standard for environmental due diligence but they can also be overkill for particular properties. Properties that are vacant and have always been so are good candidates for other forms of environmental reports. Properties that are new, newer, or lightly used from an environmental standpoint are also good candidates. Most residential properties can be good candidates too.
What are these other environmental reports you speak of?
The Record Search with Risk Assessment (RSRA) is a smaller, faster form of environmental due diligence. These are created with the same environmental database we use for the Phase I Environmental Site Assessment but don’t require visual inspections from an environmental professional. They also cost about half as much.
Environmental Screens (ES) are another option. They are really inexpensive and very fast assessments of environmental risks.
Both of these options, if not suggested by your commercial loan officer, should be suggested by you. Commercial banks don’t want your closing costs any higher than they need to be. You can argue, when appropriate, that a full Phase 1 ESA is overkill and a simple Environmental Database Report (EDR Report) is sufficient.
If you need third environmental reports, give A3 Environmental Consultants a call. We’ll work to get your Environmental REC removed with the utmost confidentiality, we’ll meet or exceed ASTM Standard E1527-13 on any sort of commercial investment or industrial property. Our reports meet the requirements of all lenders and government agencies such as the Small Business Administration (SBA), Housing and Urban Development (HUD), and the United States Department of Agriculture (USDA). A3 Environmental Consultants can be reached at (888) 405-1742 or by email at Info@A3E.com.