Hunt's Commercial Real Estate / "Environmental Reports"

Q: We have made an offer to purchase a building. While the property seems environmentally clean, the whole issue seems like a mine-field. What is our best course of action ? A: When purchasing any real estate, one of the most critical items on any check list is the box labeled "environmental." There are several critical reasons that a comprehensive environmental report must be done, not the least of which is the fact that nearly every lender will mandate such a report. To complicate matters, the seller may have conflicting goals and not want you to go on an unlimited "fishing expedition." This environmental report MUST be done properly. With current environmental laws, the failure to protect yourself with a comprehensive report could be more expensive than the entire acquisition cost of the project! So when you negotiate the contract of sale, make sure that you have the right to conduct a Phase I inspection, with further rights to a Phase II inspection if the Phase I is positive in any way. The priority after signing contract is to hire a reputable environmental firm to do a Phase I on your building. A Phase I report involves researching the historical uses of the property as well as walking through the potential site doing a visual inspection. A certified environmental engineer will look for discolored concrete, new patches of concrete or asphalt that might indicate the removal of underground tanks (USTs.) He will also be looking for other environmental concerns, such as 55 gallon drums. A lender will typically have a list of approved environmental companies, so make sure you have that list before hiring an engineer. It is good practice to interview at least two companies and request proposals from both of them. When hiring the firm, I like to let the principals know if they find information that will cause the need to do some physical work (a Phase II), their company will not be handling that component of the work. This will avoid the situation where your environmental engineer is incentivized to find issues. You want to avoid being in a position where your consultant and you have different goals. A Phase II report can create further issues. Some sellers prefer not to know about problems. Once a problem is known, the seller may have a responsibility to remediate the issue. A potential solution is to have your attorney hire the environmental engineer. This creates a confidential relationship that may remove the necessity of reporting findings. Current environmental law makes the purchaser responsible for uncovering any existing environmental contamination prior to purchasing the property. The stakes are very high, since responsibility can be personal, as well as "joint and several." Many older sites have cost millions of dollars to remediate, so make sure that all of the above steps are carefully followed to insure a successful purchase. Mark Fischl is a partner and senior managing director of Hunt Corporate Services, Inc., Syosset, N.Y.