Page 12
— Multifamily Properties Quarterly — May 2016
D
uring commercial prop-
erty transactions, often it
is mandatory to perform
some level of environmental
due diligence to ascertain
the properties being purchased are
not contaminated or likely to cause
potential environmental concerns.
However, prospective buyers can
make fatal mistakes by not doing
a sufficient level of environmental
due diligence, resulting in having
to pay significant financial dam-
ages. Many people who apply for a
loan to buy a property, by their own
choice, do not want to conduct an
appropriate Phase I Environmental
Site Assessment because they want
to close the transaction quickly and,
usually, are only interested in meet-
ing a lender’s minimum require-
ments.
To quickly close the deal, buyers
and lenders typically try to guide
environmental due diligence to their
predetermined outcomes to mini-
mize or incompletely identify envi-
ronmental conditions. Simply satis-
fying a lender’s minimum environ-
mental due diligence requirements
does not guarantee protection from
federal and state environmental
cleanup liability.
The value of an environmental
site assessment greatly relies on
the skill of the consultants involved.
In recent years, the risk of liability,
competition among firms and low
profit margins for Phase I ESAs con-
tributed to a reduction in the num-
ber of qualified consulting firms
willing to perform these services.
In spite of this, and even as
demands on consultants increased,
the price of a Phase
I ESA has dropped
significantly. This
problem is aggra-
vated by the ten-
dency to retain
the lowest bidder,
because the dif-
ferences among
assessments is
unknown and the
real value of the
environmental due
diligence often is
interpreted as a “necessary evil”
imposed by the lender. Consequent-
ly, even consultants who would like
to produce a quality work product
are under pressure to complete their
task as quickly and cheaply as pos-
sible.
This trend presents severe risks
for those who rely on environmen-
tal site assessments to make critical
decisions, as well as consultants.
Aside from obvious liability for
remediation costs in the event that
contamination is overlooked, the
property’s value may be seriously
undermined. Additionally, business
operations at the properties could
be affected by remediation activities
and delays caused by such activities
could result in increased holding
costs and lost opportunities.
Quality of Phase I ESAs varies
greatly from company to company
even though the same standard
(ASTM E1527-13) is used as a basis.
Parties who order Phase I ESAs
from consultants range from large
lending institutions and real estate
developers to small mom-and-pop
storeowners to people investing
their retirement fund on properties.
In addition, a Phase I ESA can cost
as little as $1,000 to as much as
$20,000, depending on the location,
size and condition of the properties.
All of these variables play a role in
determining the quality of Phase I
ESA. These variables also confuse
prospective buyers. Among so many
environmental consultants promis-
ing most cost-effective and incom-
parable environmental due diligence
services, how should a buyer make
an informed decision?
From the perspective of buyer, the
significance of selecting a compe-
tent environmental due diligence
consultant cannot be overstressed.
We provide the following recom-
mendations to prospective purchas-
ers:
• Even if you are buying a property
without going through a lender, do
your diligence and hire an consul-
tant to do a Phase I ESA.
• Do not shop around for the
lowest bidder. Try to avoid those
consultants who promise a Phase I
ESA for $1,000 within one week. Too
much risk is involved with buying a
property not to conduct a thorough
environmental assessment.
• Request a statement of qualifica-
tion from the consultant you plan
to hire.
• Additionally, before engaging
your consultant, confirm that he
carries liability insurance.
• Try to hire a consultant who
understands your business risk. A
Phase I ESA can have various rec-
ommendations based on the type of
transactions and lender’s require-
ments.
• Talk to your consultant and
define clear objectives of a Phase
I ESA to be conducted. A compre-
hensive scope of work should be
developed with your consultant that
focuses on the purpose of the trans-
action, the need of prospective buy-
ers and is consistent with current
standards.
• There are Phase I ESA reports
generally viewed as seller’s Phase
I ESAs and buyer’s Phase I ESAs. A
consultant hired by a seller may
attempt to mitigate any on-site
issues. On the other hand, a consul-
tant hired by a buyer may try to be
more conservative. Do not rely com-
pletely on seller-provided informa-
tion and documents.
• Go beyond what a typical Phase I
ESA does. This can be done by hiring
qualified consultants, giving them
sufficient time (three or four weeks)
to complete the work, requesting
all regulatory agency files to be
reviewed and providing them com-
plete access to the property.
When in the market to buy a
used car, almost everyone uses Car-
fax to check the vehicle’s history.
Regardless of a lender’s require-
ments, when you are spending
lots of money on a property, why
would you try to get away with
doing an incomplete environmen-
tal due diligence, just to save a few
hundred dollars? Take your due
diligence seriously and understand
the process before you buy. Most
importantly, do your research before
retaining an environmental due
diligence consultant. This will be
the most critical variable during the
process.
s
Joseph Kim
Project manager,
GRS | Corteq
Investment Insights
