Your dream office may have a murky past — brand-new buildings and decadent landscape can cover up what lies beneath. Environmental issues are a concern for business owners and also banks, which require Phase I and II Environmental Site Assessments (ESA) following property appraisal.
“I’ve seen people sign purchase agreements without getting a Phase I or Phase II test and they are stuck with a contaminated piece of property that they have to clean up,” says Stephen Neal, vice president of business banking for Sky Bank. “Then, if contamination seeps into the public water system, it’s a mess.”
Cleanup can cost thousands of dollars, and regulatory action can spin into expensive lawsuits. Ultimately, ESAs are designed to protect business owners, who may not realize the property they want to purchase sits on contaminated land or redeveloped brownfield. A strip center built on a lot where an old gas station went out of business needs Phase I and II tests to determine whether oil tanks leaked into the soil or groundwater.
Smart Business asked Neal to explain Phase I and Phase II ESAs and why you can’t afford to purchase property without them.
What factors determine whether a site needs to be tested?
First, a bank will engage an appraiser to evaluate the property. The appraisal will indicate whether a future study is necessary. If an office complex is less than $1 million, some banks will start with a basic environmental questionnaire. Banks will ask questions such as: Has this site been used for anything other than what it is used for now? Are there any tanks on the property? Has there been storage contamination in the area? If any responses spark concern, further study of the property is required through a Phase I and possible Phase II assessment. All properties over $1 million require Phase I studies.
What happens during a Phase I assessment?
This is an assessment of the overall property - a narrative describing what the site is now and what is was previously. An engineering firm will review historical sources, such as aerial photographs, maps and city directories. They will also review agency records, including local fire, health, building and water quality. The assessment will describe topography and the firm will conduct a visual survey to look for asbestos-, lead- and PCB-contaminated materials. If there are any red flags, the firm will order a Phase II study.
What tests are conducted during a Phase II study?
The purpose of Phase II is to acquire information relating to possible contamination of surface and subsurface soils, and groundwater. The engineering firm will also conduct a soil gas survey and geophysical survey. Phase I tests don’t uncover the less obvious contaminate issues. Phase II digs deeper.
Who pays for the test, and what happens if the property is contaminated?
A lot of times, the business owner, or purchaser, will pay for the study. But you can negotiate this with the seller. A Phase I test costs $1,500 to $2,000 and the Phase II test can run up to $5,000. Both are conducted by engineering firms or independent contractors, not the bank.
What questions should a business owner ask a seller before even considering the property?
The building’s history is important, so buyers should make specific inquiries of sellers. They should consult statutory and regulatory bodies and obtain a site report. Ask sellers whether they engaged in a Phase I, Phase II or any environmental study for contamination. Buyers who decide to purchase the land without the help of a bank and do not ask these questions are responsible for any contamination leaks.
What are the consequences of signing a contract without engaging environmental studies?
Contaminates can leak into the water and sewer systems and affect residential neighborhoods, park systems or school areas. If a bank has a mortgage on the property and the client pays the bank for the loan, the bank is liable. Say a business owner purchases the land knowing it might be contaminated and pays off the loan. If the bank is served with a class-action lawsuit because of contamination, the business owner would also be implemented.
What if a business owner does not go through a bank to purchase the property?
A business owner may have the cash to buy the property, but should fully understand the ramifications of what could happen if he or she purchased contaminated property. Make sure an attorney reviews the transaction carefully. Once a purchase agreement is signed, that is a contract. There should at least be a clause or statement that notes that the appraisal and environmental reports are acceptable to protect the buyer.
STEPHEN NEAL is vice president of business banking for Sky Bank. For more information, visit www.skyfi.com.