Posted by ray@lcorn on June 14, 2006 at 13:16:07:
Good to hear from you, hope life is good!
Most lenders, including banks, require a Phase 1 as part of basic underwriting requirements. And older properties are actually more prone to problems, so you’re protecting yourself by doing the Phase 1 before you own it.
Costs vary depending on how many engineering firms are in the area. Many firms use the Phase 1 as a loss-leader to get additional business from the investor/developer. Average cost is around $2000-$2500, but I’ve paid as little as $1200 from a new firm in town trying to drum up business.
Here’s an excerpt on the subject from my book “DealMaker’s Guide to Commercial Real Estate”:
Phase I Environmental Reports have become the standard for almost any loan from any source. An Environmental Phase I Assessment is an inquiry conducted to determine the environmental status of a property or facility in connection with a real estate property transaction. It follows testing standards that include those published by the American Society for Testing and Materials (ASTM; www.astm.org).
The Phase I report includes a review of public records and databases maintained by each state and the federal government for environmental ?events? or known contaminations on the property or the immediate vicinity; interviews with all owners available in the chain of title for a specified number of years; and a visual inspection of the property. Included in the review is a LUST Survey (Leaking Underground Storage Tanks) for the site and the area within a one to three-mile radius to determine if there is any downstream risk to the site from known hazards. A Phase I report does not include any testing or sampling. Based on the findings from the review of public records, a conclusion will be offered as to whether or not any further action is recommended. If no further action is called for (also known as an NFA finding), the site is referred to as ?clean,? the report is delivered to the owner and lender, and the file is closed.
If the Phase 1 report does recommend further action, there will be a recommendation as to what type of action is warranted. For a site with only suspected contamination a Phase II Environmental testing may suffice. A Phase II report is called for when the site has had some prior use that raises the possibility of contamination, even though there is no reported or visible contamination. The project will include several shallow soil samplings and testing of the samples for contaminated material. Groundwater sampling may be included in areas of high run-off or flowing streams. The report will then conclude whether further action is necessary.
A site with confirmed contamination from a prior user, the results of a Phase II project, or visible evidence of environmental risk will require a Phase III Environmental Report. These projects include a full range of sampling and tests, such as core drilling, ground penetrating radar, and asbestos and lead sampling. The objective is to establish not only the degree of contamination onsite, but also the extent of the vertical and horizontal plume of contaminants both onsite and offsite. If the source of the contamination no longer exists, the engineer will recommend a course of remediation in accordance with state and federal regulatory and statutory requirements. Appropriate measures for the removal of contaminated materials range from excavation and replacement of the soil to capping the area and leaving well enough alone. Remediation may include monitoring wells placed on the site at the owner?s expense with testing performed over a number of years before the file can be closed.
I will note here that, except in the most severe cases, environmental problems do not spell the automatic death of a deal. The general perception among small investors is that a contaminated site exposes an owner up to all sorts of nightmarish consequences and should be avoided at all costs. These situations occur, but are rarely the fearsome problem that many believe. Over the last decade, the environmental analysis and remediation processes have become predictable through the standardization of procedures and a more equitable assignment of legal liability. Many states have funds for cleaning up old sites where the polluter is no longer in business or cannot be found.
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Finally, if you?re interested in doing some pre-due diligence snooping (and who isn?t!), the EPA maintains a database of known environmental sites. The agency calls the tool the Enviro-Mapper and it is accessible by the public at www.epa.gov/enviro/ej. The database is searchable by address, zip code, county or city in a slick format. It displays a street map of the area with registered polluters shown as color-coded squares.
Before you enter your home address and jump out your skin when you see the results pop up, remember that every business that deals with any substance considered to be an environmental hazard must register with the EPA. This includes gas stations, dry cleaners and convenience stores.
I know that isn’t what you wanted to hear, but believe me, this is part of doing complete due diligence. If you buy the property without it and later a problem comes up you will really wish you had the report to establish liability.