Why You Need a Phase 1 Environmental Report for a Commercial Property Loan

When it comes to commercial real estate, one of the most important forms that commercial real estate brokers need to be aware of is a Phase 1 environmental report.

Not sure what a Phase 1 report is or why you need it? Below, we have composed a guide to Phase 1 environmental reports. We discuss what they are, why you need them, and what benefits they offer. Once you read our guide, you will never do a real estate deal without one.

What Is a Phase 1 Environmental Report?

A Phase 1 environmental report outlines any environmental risks that were discovered during an inspection of commercial property. This inspection is typically called a Phase 1 environmental site assessment (ESA).

Environmental professionals perform Phase 1 assessments. These assessors follow ASTM standards to ensure they cover every critical area of an assessment. Specifically, they follow ASTM E1527-13, which is the standard that details the proper methods for performing a Phase 1 environmental site assessment.

Then, the concerns listed in environmental site assessment reports are known as recognized environmental conditions (RECs).

Phase 1 environmental reports are often required during commercial real estate deals. Even if they are not, booking a Phase 1 ESA is a great idea. Phase 1 ESAs should be performed for both developed and undeveloped sites. A Phase 1 ESA protects all parties involved in the deal, including you.

How Are Phase 1 Environmental Reports Produced?

Creating a Phase 1 environmental report requires assessors to perform several steps. These steps include the following:

1. Document Review

All Phase 1 ESAs begin with a document review period. Assessors will collect documents that pertain to the subject site. Examples include the following:

  • Records of owners
  • Titles
  • Deeds
  • Business licenses
  • Permits
  • Aerial photographs

Assessors may also review fire insurance maps and records from health departments. The fire insurance maps can help determine the risk that a property will suffer fire damage.

During the file review, assessors want to find out what the site has been used for. If the site is undeveloped, this process is very brief. On the other hand, sites that have been used for many purposes will take longer to review.

Assessors want to know if the site has been used for any concerning activities. For instance, sites used for gas stations often contain RECs. These sites will likely need remediation before they can be used.

The document review process can provide vital information about a property. Your clients can use this data to make informed buying decisions. The findings of the assessors may decrease the value of a site. The records may also reveal that the site requires an additional inspection.

2. On-Site Assessment

After the records review is complete, inspectors will perform an on-site assessment. They will walk the entire site. They will also inspect any buildings that are present.

The assessors are looking for hazards. They are not inspecting the state of the buildings for maintenance cost estimate purposes. This is performed as part of a property condition assessment (PCA). PCAs are also important for real estate deals, but they address different concerns. Risks that assessors may uncover include the following:

  • Storage tanks
  • Pipes
  • Chemical waste
  • Steel drums
  • Contaminated soil or groundwater.

Each risk will be outlined in the Phase 1 environmental report. The report will also include suggestions for addressing each REC. The suggestions may involve removing contaminated soil, digging up tanks, or disposing of waste.

3. Report Creation

The final step is to create the Phase 1 environmental report. Making a report for an undeveloped site is much easier and faster. These reports can be returned in as little as a week.

However, creating reports for developed sites may take a bit longer. Still, assessors usually return reports within about three weeks. This allows you to move forward with your real estate deal without delay.

When booking a Phase 1 ESA, make sure to ask about average return times. The best firms offer a guaranteed report creation time frame. Working with such a firm will help take the guesswork out of the reporting process.

Why Do You Need an ESA Report?

You need a Phase 1 environmental report for several reasons, including those outlined below.

1. Reduce Liability

If your client buys a property without first obtaining a Phase 1 ESA, they may be liable for any hazards that are present. Environmental regulations like the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) allow the EPA to recover the cost of site remediation from your client.

Buying a site with hazards can also expose your client to other liabilities. If they do not obtain a Phase 1 report and workers are injured by hazards, they could be sued. These lawsuits can cost thousands and ruin their brand image.

A Phase 1 environmental report will help your clients decide whether they want to purchase a property. They can weigh the pros and cons of buying real estate. If a site is highly contaminated, they may choose not to close the deal.

2. Confirm Site Usability

The sooner your clients can use a piece of real estate, the faster they can start recouping their money. Contaminated sites may require remediation before they can be used. In these cases, your clients might not be able to begin working on a site for weeks or months.

A Phase 1 environmental report will help clients understand when a site can be used. If a site requires months of remediation, they can plan accordingly. They may also be able to negotiate down the price of the site based on the findings of the report.

Some sites may not be safe to use at all. A Phase 1 environmental report will help bring this fact to light by recommending further inspections or helping you decide whether to continue with the deal.

3. Improve ROI

Phase 1 environmental reports can boost your clients’ returns on their investments. They can more accurately gauge the value of a site so that they do not overpay.

A site that requires extensive remediation is less valuable than a property that does not. This is because remediation takes time, keeping the client from using the property right away. Remediation can also be very expensive.

In short, Phase 1 environmental reports will allow clients to make wiser buying decisions. They can more accurately determine whether the site is the best choice for their project goals.

4. Protect Clients and Workers

A Phase 1 ESA will protect your client from buying potentially unusable property. While a Phase 1 ESA does not reveal everything about a piece of real estate, it does provide quite a bit of information.

Phase 1 ESAs also protect people who will be working on the site. This includes construction crews and those who will manage the business itself.

In addition, Phase 1 ESAs can determine whether a site is suitable for a specific use. For example, there are different standards for sites that will be used for apartments vs. manufacturing facilities.

5. It May Be Required

Lenders may require Phase 1 environmental reports. Many lenders mandate buyers to obtain these reports. This is because lenders want to ensure that the land they are financing is worth the purchase price.

Contaminated properties can expose the lender to serious liability. Another concern for lenders is foreclosures. They may not be able to recoup their money from contaminated sites.

Encouraging your client to schedule a Phase 1 ESA early can help prevent any last-minute delays. As you know, being surprised just before the closing deadline can undo all of your hard work and ruin a real estate deal.

What Happens If a Phase 1 Report Reveals RECs?

Phase 1 environmental site assessments are general inspections that look for signs of recognized environmental conditions. If a Phase 1 environmental report reveals the presence of RECs, don’t panic. The presence of RECs does not mean that your deal is dead in the water.

However, you may need to book a follow-up inspection known as a Phase II environmental site assessment. Phase II ESAs are more targeted than Phase I inspections.

During a Phase II ESA, inspectors look closely at the specific concerns found in the first assessment. They may perform tasks like collecting soil or groundwater samples. They might also search the site to locate underground storage tanks or hidden pipes.

A Phase II ESA report will outline how much remediation is needed. It will include cost estimates for these services so that your client can make an informed purchasing decision. The information gathered during a Phase II report can also be used at the negotiating table.

Learn More About Phase 1 Environmental Reports

A Phase 1 environmental report is vital any time commercial properties are purchased.  A Phase 1 ESA helps your clients learn more about the environmental risks present at the property they are buying.

By learning more about Phase 1 environmental reports, you can better serve your clients. A great way of boosting your environmental compliance knowledge is to sign up for the RSB Environmental email newsletter. In each newsletter, our pros discuss key topics like Phase 1 ESAs, site remediation, and more.

Sign up today by emailing info@rsbenv.com to be added to our list. We’ll help improve your ability to guide your clients through the commercial real estate purchasing process!