When selecting a new project, either a residential, commercial, or large-scale land development, environmental due diligence, specifically a Phase I Site Assessment, is a critical step in choosing the right property.
Developers, investors, and users may focus on the location, the structural integrity of the building, or the value of the commercial property, but performing the appropriate environmental due diligence is not only a vital piece of the due diligence pie, but it can also be the most important.
The Level 1 Environmental Assessment can play a vital role in saving you time and money and, having the right company performing this assessment can provide the decision-makers with crucial pieces of information required to make the right decisions before it is too late.
Here are the reasons why Phase I Environmental Site Assessment is so important
1. Business Risk
If contamination exists in the property in the form of soil and groundwater contamination, and it is brought to the regulatory body’s notice. Remediation of the contamination can cost from thousands to millions depending on the area and extent of the contamination. The issues that are identified by a Phase I Site Assessment include past and present gas stations, dry cleaners, and industrial processing plants. It is prevalent that the current property may not pose any environmental risk, but its past usages may have caused environmental damages. For example, the existing property is a restaurant but was a gas station in the past. The existing property has various shops but a dry cleaner may have operated on the existing property. If a Phase I Site Assessment is carried out properly, it should be able to discover such issues and appropriate mitigation measure can be taken after carrying out Phase 2 Environmental Site Assessment.
2. Lender’s Requirements
Phase I Environmental Assessments are not required for every commercial real estate transaction, but they are most needed when a lending institution is involved. Lenders mostly need it before they process a loan for a commercial property. They do that to ensure that any hidden contamination does not affect the value of the property, and also it can affect the borrower’s ability to repay the loan. Lender’s risk is if the borrower fails to pay the mortgage on a commercial real estate property and the bank has to foreclose that property, then they are not foreclosing on a contaminated property. It is tough to sell contaminated property.
3. Lenders/prospective buyers may need one
If a buyer purchases a property by cash and then he may not feel the need for doing a Phase I ESA. But while selling the prospecting buyer may need financing hence, he needs a Phase I ESA. In that scenario, if the property has contamination, then the seller is now liable for that contamination issue. In such a case, the financing of the property is challenging, and the seller will find it extremely difficult to sell the property without removing the contamination and getting a closure letter from the regulatory authority. This process is not simple and may take years to get a closure letter before the seller can sell the property.
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4. Environmental Damage
It is not the end of the world for a property owner if he finds that the property is contaminated. The property can be re-mediated under the regulatory body’s oversight, and it can be bought or sold once there is a closure letter from the respective regulatory authorities. The purchaser may want to get a Phase 2 Environmental Site Assessment to establish the cost of remediation, and based on the price, the buyer can negotiate with the seller and ask for a discount. When the contamination is discovered, the purchaser is in a much better position and may decide to either purchase the property at a discounted rate or completely walk away from the deal. A prospective buyer must carry out the environmental due diligence to mitigate the risk of buying a contaminated property.
Conducting environmental due diligence will relieve the potential buyer of any environmental liability. That is why it is recommended to do proper due diligence before investing in commercial real estate.
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