Environmental problems related to real estate can be avoided
There is nothing worse for a homeowner than finding out that their property has an environmental problem. Contamination is one of the few obstacles that often cannot be overcome. Usually, the owner’s problems could have been avoided if he had conducted a proper investigation when purchasing the property.
As a business broker, I often get calls from people seeking advice on how to handle a bad environmental situation. Most of the time the broker was hired to sell the property, found a buyer, and an inspection report identified some type of problem that derailed the transaction.
When purchasing a large lot or commercial property, it is always recommended that buyers hire an environmental engineer to perform a âphase Iâ environmental assessment. The Phase I report will notify a buyer if there are historical contamination issues with the site or with other surrounding properties. Typically, the report will also include information on underground storage tanks, historical uses, aerial photographs from previous years, and other data valuable to an owner.
Phase I environmental assessments will typically cost between $ 2,500 and $ 5,000, depending on the size and complexity of the property. The majority of the assessment consists of documents accumulated from various sources. The report also includes an on-site inspection. On-site inspections are where most problems arise. By rereading Phase I, a buyer searches for four key words. “NO OTHER ACTION REQUIRED”
There are several steps that vendors need to take to ensure that the Phase I on-site inspection is going well. Below is the checklist I provide to sellers as a guide.
- Walk around the property and look for potential unwanted items.
- Remove all abandoned or unnecessary vehicles.
- Any oil or chemical stain should be cleaned well in advance.
- All drums must be removed. Empty drums, oil cans, water cans, etcâ¦ all should be removed to avoid any questions.
- All underground tanks properly removed and sealed. Make sure that permits and inspections are carried out correctly. If there are any underground tanks left, make sure the area around the tank is clean and the tank is clearly marked.
- Areas near above ground tanks should be clean and have suitable linings under the tank. Never have an above-ground tank placed above the ground.
- Make sure all areas used for drainage are clear and free of debris.
- The paved areas are clear and clean of oil stains and trash.
- Septic tanks, if any, are clearly marked and the areas around them are clean and landscaped.
If sellers follow this list, many of the pitfalls that appear in a phase I to kill transactions can be avoided.
What if there is a problem noted in Phase I?
Once the seller and broker know about the problem, they are obligated to disclose it to any future buyers. If a seller refuses to disclose the issue in the future, they could face legal consequences. If the seller remedies the problem, they are still required to disclose that there was a problem. They should state how the problem was resolved and this will often satisfy the next environmental engineer performing an assessment.
If a buyer wishes to go ahead and buy the property with the problem, they can do so, but they would inherit the potential responsibility for any cleanup or remediation. I have never seen a lender move forward in a transaction without a âcleanâ Phase I that says, âNo further action requiredâ. There are good reasons for this, as the bank may one day have to seize and take possession of the asset. Banks are always afraid of owning real estate with potential environmental problems.
Phase I usually indicates one of the following three things. The first and most common is that the property is clean. The second is that Phase I recommends some type of remediation that could have been easily avoided had my list above been followed. Finally, Phase I may recommend further investigation through some sort of limited spot test or a full Phase II environmental assessment.
The Phase II evaluations differ in one major respect. They include drill samples. The cost of these reports can range from $ 10,000 to $ 100,000, depending on the complexity and number of samples required. The more borehole / soil samples collected and evaluated, the more expensive the report. Likewise, the higher the clean soil samples evaluated and received, the lower the risk of contamination of the property. If a lender is involved, they will often set the standard on how many samples and where they should be taken in order to meet insurers’ requirements.
When buying commercial property, the first thing buyers should ask for is any previous EAs. The age of the report and the use of the property since the report was written will determine if a new report is required.
If questions exist about existing or new reports, always consult an environmental lawyer for advice.