When commercial properties are bought and sold it’s frequently done by someone who is new to the process. Chances are high that you are a first time buyer or seller. So once a contract is signed, or better yet, before a contract is signed, the question comes up, “ Who pays for the Phase I Environmental?”. The answer is, “It’s a negotiation, the best negotiator gets the other guy to pay.”
It’s logical that if you are the buyer, you want the property owner to pay for the Phase I Environmental. If you’re the seller, you want the buyer to pay. Stay tuned, there’s more to it than that.
The Buyer’s Perspective to Environmental Due Diligence:
If you are a buyer, you should try hard to negotiate away paying for the Phase I Environmental. The reason is simple yet profound. Commercial Real Estate transactions implode all the time for all sorts of reasons. Sometimes it’s financial, sometimes it’s because of environmental reasons. The environmental professional doing the due diligence still needs to get paid. So if your real estate deal blows up do you really want to pay the $2,000 for a Phase I Environmental on a building you’ll never buy?
I didn’t think so.
Better Strategies for Buyers in Order, From Best To Worst.
- Seller agrees to pay.
- Seller pays and at closing the buyer pays the seller back. (The reason this is better is unstated but really important, if the sale doesn’t go to close, the buyer pays nothing. )
- Buyer raises the contract price by the cost of the Phase I Environmental, Seller pays the consultant. (This is just a variation on the solution above.)
- Buyer pays unless the property comes back with Recognized Environmental Conditions (RECs) at which point the seller pays. (This has the double bonus of getting the buyer off the hook for paying if there are problems AND engaging with the ego of the seller. It says subtly, “If your property is clean, you’ll have nothing to worry about.”)
- Buyer pays for the Phase I ESA. Seller pays for the Phase II ESA. (If necessary)
Three more thoughts regarding property buyers paying for Phase I Environmental Site Assessments:
If the buyer paid for the Phase 1 Environmental, the physical report and any information inside it is the private property of the buyer, not the seller. So if it comes back showing environmental contamination the seller might know but they don’t have a right to have a copy of the report. If your deal blows up, the seller will face the same scenario with the next potential buyer, potentially over and over again.
If a report shows environmental risks that need to be rectified for you to purchase the property, it’s a new opportunity to negotiate the price down.
As the buyer, you should ALWAYS pick which environmental consultant does the work. There are differences in quality of consultants. If the seller picks the consultant with a motivation to find the least expensive, you will most likely get a level of quality that matches the price.
Strategies for sellers when faced with paying for environmental due diligence.
There’s no mystery in why a seller would not want to pay for a Phase I Environmental. They don’t want to spend the money. However if you are a seller, you shouldn’t automatically reject paying for the environmental due diligence. Often there are good reasons for paying.
Why a seller would want to pay for a Phase I ESA:
- Demand for the property is low. If you’ve been marketing your property for a year and this is your first offer, you probably want to pay for the Phase I Environmental.
- Outward appearances lead a buyer to suspect environmental issues. Certain property types have known red flags. Automotive, metals & metals plating, dry cleaning and anything that has ever had tanks of anything underground are all suspect. Sellers should get ahead of the questions or risk losing a sale, possibly multiple times with multiple buyers.
- Control the unknown. When a buyer retains their own consultant, you never know what kind of problems they will make for you. If a seller hires his own consultant, you can hand a clean report to the buyer even before they make an offer.
Remember, the Phase I Environmental is the property of whoever bought it. If the buyer wants to “rely” on the report for lending purposes, they will need a “reliance letter” from the consultant that did the work. If and when they ask for the reliance letter, the seller can negotiate to recoup some or all of their money.
Counter strategies for sellers when asked to pay for environmental due diligence:
The best counter strategy when asked to pay for a Phase I Environmental as a seller is to offer to pay at closing. If the sale doesn’t make it to closing, you’re not out the money.
The second best strategy is to make sure the report is written with the seller’s name on the document. The buyer would need a reliance letter, but the report could be used over and over by the seller.
If you’re concerned about environmental contamination on your property or one you are interested in purchasing, give A3 Environmental Consultants a call. We’ll get your project done with the utmost in confidentiality, we’ll meet or exceed ASTM Standard E1527-13 on any sort of commercial 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.