Phase 2 environmental surveys are a critical aspect of due diligence for commercial real estate brokers. They help reveal the severity of contamination on commercial property and serve as a guide to protect the interests of all stakeholders involved in a deal.
However, protecting the interests of your client and/or your company is not the only function of these surveys. Phase 2 surveys can also be used as a powerful negotiating tool when making deals. Join us as we explore how to use the survey findings to your advantage.
What Is a Phase 2 Environmental Survey?
A Phase 2 environmental survey is also known as a Phase II environmental site assessment. Both terms refer to the exact same assessment process. Phase 2 ESAs are follow-up surveys that are only needed if a Phase 1 ESA discovers the presence of recognized environmental conditions (or RECs). RECs include:
- Storage tanks
- Hazardous substances
- Storage drums
Certain types of sites will also require Phase 2 ESAs, even if RECs are not found. A few examples are properties that were previously home to properties such as dry cleaners or gas stations.
Phase 2 ESAs are used to explore further the RECs found in a Phase 1 ESA. During these surveys, inspectors will collect water and soil samples. The samples are tested to determine what contaminants are present and in what quantities.
What Aspects of a Phase 2 ESA Should You Focus on?
Phase 2 ESA reports are extensive. They include photographs, sample data, lab findings, and other data points. It can be easy to get lost in the sea of information.
The good news is that you do not need to read Phase 2 ESA reports cover-to-cover. Instead, you can focus on a few key areas.
First off, look at the findings regarding the samples. These findings need to be compared against state regulations to determine whether the samples exceed thresholds. Don’t worry about looking up the thresholds, though, as relevant regulations will be included in the report.
If quantities exceed state limitations, the property may have use restrictions. These restrictions can prevent the buyer from following through with their plans for the site.
Additionally, you should review the recommendations section. The assessor will either recommend remediation or confirm that the land is safe for use. If remediation is required, the assessor will provide a quote for these services. This quote will help you decide whether to cancel the deal or pursue a revision to the deal.
What Concerns Should Prompt a Broker to Cancel a Deal?
Generally, brokers should not make recommendations to cancel unless asked by the buyer. RSB Environmental does not make these types of recommendations either. Instead, our firm presents facts and advises you if further action is needed.
Rather than making a recommendation to your client, we recommend relaying the report’s findings. This information will help the buyer make an informed decision based on relevant facts regarding the land’s usability. If you are asked for a recommendation, then you should base your feedback on the report’s findings.
How Brokers Can Use Phase 2 ESAs to Proceed with a Deal
The primary function of a Phase 2 survey is to determine whether remediation is necessary. Remediation involves improving the site to reduce contamination. Naturally, remediation costs can be quite extensive. They can easily total $100,000 or more, depending on several factors.
Information about remedial action plan and cost is usually provided under a separate cover. This data is extremely valuable during commercial real estate negotiations. Specifically, brokers can use this data to:
- Negotiate a better price
- Provide guidance
- Request the seller cover remediation costs
1. Using a Phase 2 ESA for Price Negotiation
As noted above, remediation costs can vary greatly. Fortunately, Phase 2 ESAs will provide an estimate of remediation costs. As such, brokers can use this data to negotiate a lower price for the property.
For instance, let’s say that remediation is projected to cost $100,000. The buyer could ask the seller to reduce the purchase price by that amount.
Phase 2 survey data can be used to negotiate the price in other ways. For example, some properties have use restrictions even after remediation. If a site has a use restriction that makes the groundwater non-potable, this can severely impact the price. Adept brokers will use this data to their advantage.
Brokers should argue that use restrictions could reduce the land’s value. This assessment will strengthen your client’s case for a lower purchase price because the buyer will be more limited in terms of what they can use the land for.
2. Using a Phase 2 ESA to Provide Guidance to Clients
Brokers and agents must look out for their clients. They are also tasked with protecting the interest of the financial institution backing the transaction. Phase 2 surveys help them accomplish both goals.
Proper phase 2 survey data can be used to help clients decide whether to proceed with a deal. If land cannot be used for the buyer’s intended purpose, then striking the deal is an easy call. However, things are not always so clear.
For instance, let’s say a site will require $200,000 to remediate. In this case, the buyer must decide whether they can absorb these added costs. When remediation is needed, buyers must also be willing to delay their plans, as remediation can take months to complete.
As you can see, many variables are at play when Phase 2 surveys reveal that remediation is necessary. That is why choosing a reliable assessment team like RSB Environmental is critical to help protect the interests of everyone involved in the deal.
3. Using a Phase 2 to Request the Seller Cover Remediation Costs
Phase 1 and Phase 2 ESAs are relatively affordable. Phase 1 ESAs usually cost a few thousand dollars. Most Phase 2 ESAs cost between $6,000 and $12,000. However, they can cost as much as $20,000 in some instances.
The buyer almost always covers these costs because they are considered part of due diligence. But remediation costs are a different story.
Remediation costs can often be negotiated during a transaction. On that note, sellers are unlikely to cover all remediation costs, but they will likely cover a portion of them if they want to close the deal. This setup can reduce the buyer’s out-of-pocket expenses.
Schedule a Consultation to Learn More
Need to book a Phase 2 environmental survey for your client? If so, then contact RSB Environmental today. We offer 2-3 turnaround times that far exceed the industry average. We will help keep your deal on track and enable you to protect your client.