A Phase I ESA is mainly used to prevent the accidental purchase of a contaminated or otherwise environmentally compromised commercial property at a price that doesn’t take into account the environmental risk or impact.
The strategies for purchasing a Phase I ESA depend on which party you are to the transaction. There are generally three parties to a commercial real estate transaction; seller, buyer and lender.
Phase I ESA from the Seller Perspective
Sellers are the least likely to purchase a Phase I ESA in our observation but this isn’t because it’s a bad idea. Sometimes when a seller decides to market her property for sale she chooses to get ahead of questions that will likely be asked as part of the future buyer’s due diligence process. She knows the environmental question will be asked and needs to be answered.
Savvy buyers will negotiate for the seller to pay for a Phase I ESA. So it’s not a bad idea to purchase a Phase I Environmental Report to be included as part of the marketing materials handed out to future prospective buyers.
If the Phase I ESA finds environmental impacts which will diminish the value of the property, or worse yet, kill a potential sale, it’s better to find that out well in advance of a contract for sale.
Environmental Consultants are often called last in the series of professionals that perform due diligence. But if we find problems, we are the most likely to blow up a potential sale. We see it all the time. Two parties are 3 days away from the closing table and we find a leaking underground storage tank. The buyer walks away because they don’t have the time to wait for the seller to get it cleaned up or they just don’t want the risk.
If you know you have a problem early, you can get prices for fixing the problem. The seller can choose to fix the problem or mark down the value of the property and have the future buyer fix it. This turns an “unknown” into a “known” and makes everyone comfortable with continuing the transaction.
Phase I ESA from the Buyer Perspective
If you are a buyer, you need a Phase I Environmental Assessment because if you buy a property without one, along with the property you purchased the environmental liability. It’s like purchasing a swift kick in the wallet. The fact is, properties that have environmental contamination are frequently over-valued and over-priced, often by the entire cost of cleanup which could range into the hundreds of thousands of dollars.
It’s not unheard of for a property to be worth nothing after the environmental cost of cleanup is factored in. You probably see it all the time without thinking about it. That empty lot on the corner of two busy streets? Why doesn’t it have a building on it? It used to be a gas station and it’s so contaminated someone would have to pay a buyer to take it off their hands.
These properties become the county or city’s possession for unpaid taxes because there’s no good reason to keep paying taxes. You can’t do anything with the property until it’s cleaned and cleaning it costs more than it is worth. These properties are called “Brownfields”.
Phase I ESA from the Lender Perspective
Banks are smart and cautious when they lend money. They require environmental due diligence in the form of a Phase I Environmental Survey to protect themselves against environmental liability just like buyers do. If a bank doesn’t get a Phase I ESA and if the loan goes bad, when they foreclose on the property they inherit the environmental liability that comes with the property. The Phase I Environmental Inspection creates a firewall between their liability and the previous owner(s).
The main reason for financial institutions requiring Phase I ESAs is they have parameters on what’s called Loan-to-Value. It’s how much they are willing to lend against the value of the collateral. The collateral is almost always the property they are lending on. Environmental risk changes all the metrics and opens the bank to accidentally lending more than the property is worth when you take into account the cost of cleaning environmental contamination.
Phase I ESA from the Commercial Real Estate Broker Perspective
A commercial real estate (CRE) agent wants a property to be valued appropriately and sell quickly. It can often make good sense for the CRE agent to use their position as a trusted resource to counsel a seller to get a Phase I ESA in advance of listing it. Having this important piece of information greases the skids once contract terms have been agreed on.
It’s a peremptory show of honesty and good faith from the seller to the buyer which can go a long way during the often emotional times that happen around a large transaction. Finally, getting a Phase I ESA early can help to manage a property owner’s expectations long before there’s a buyer or a contract in the picture. All of these things help get both parties to the closing table faster and the CRE agent paid.
If you need a Phase I for Commercial Real Estate, or research or testing done on your commercial 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.