Phase I Commercial Real Estate

7 Replies

I wanted to know if the lender or buyer orders phase I on already built commercial property and can i recently completed phase I be used from a previous escrow?  

I advise my clients to be the one to schedule the phase 1. Lenders never move as fast as you want to, and that's just one less thing to put in somebody else's hands. Also, a phase 1 is part of due diligence which you'll want done prior to waiving your due diligence contingency, and before beginning your financing contingency.

I believe it can vary among states, but where I'm at, phase 1 reports are only good for six months. So yes, you could use one from a previous escrow as long as it's within the allotted time frame. Call an environmental inspector local to where the property is located and confirm with them.

Lenders generally require phase 1 on constructed properties. A phase 1 is good for six months. between 6-12 months, some components need to be updated. After one year, a new phase 1 needs to be performed.

Many lenders have their own scopes that go beyond the standard phase 1 such as asbestos, LBP, radon and lead in drinking water. So even if timely, phase 1 may not satisfy lender requirements.

Many lenders also have list of approved consultants. If the phase 1 otherwise satisfies lender requirements and is not stale, you could get a lender-approved consultant to do a desk top review (usually $250-$500) to allow the phase 1 to be used.

I recommend the buyer always order the Phase I. Your rights to sue for the accuracy will only flow to the person who ordered it (or gets that right assigned from Seller). Your lender will tell you how to order it, but work with a good broker or lawyer who can guide you.

@John M.

As a lender, we require an ENVIRONMENTAL SCREEN on every property we lend on. The cost of the screen is only $475 as compared to $2500 + for a Phase 1. If the screen comes back “low risk” we need go no further. “Medium Risk” and we need it evaluated by an engineering consultant ( additional $200.), High Risk or engineering consulting determining medium risk need Phase 1, we go to Phase 1. Phase 1 results can be (1) property has no limited environmental impact, no need to go further, (2) property has some environmental impact , needs Phase 2 or Phase 3, or (3) substantial environmental problems, either reject deal or find out what it will take to mitigate and adjust price for HUGE discount.

Environmental Insurance Policies have been pushed as a panacea for above problems. However, like most insurance, the properties with significant exposure are rejected by the insurance companies, and the maximum insurance co exposure is low, so that whole concept may have limited value.

Depends on the property. Some properties lenders accept if under 6 month sold or under 1 year. Phase one can generally help bolster the (innocent land owner defense). Sometimes lenders will just want a desktop update which is usually quicker and cheaper.

If for instance a property had a clean phase one from 3 years ago but little to nothing has changed with the area since then then might just want a desktop update or if development has occurred close by but not typical suspects for environmental issues.   

If the lender is going to securitize the loan or package it in a CLO, they will need a current phase 1 (six months or less, or updated from 6 to 12 months old)

Get the Phase One in your name and then read it. If you don't understand Brownfield properties, Benzine contamination, quarterly soils testing - nobody does - hire a competent environmental firm. Don't rely on insurance. If you can't be satisfied by your experts, pass on the deal. Deals are like trains, there will be another one along.

For the nasty ones check your county, using a FOIA request, and the State Department of Environmental Quality. Ingnoring Environmental can leave you holding the bag on a very costly mistake. As a seller, disclose, disclose, disclose. provide the reports and then require you buyer to have professional review. Some times a public entity as a seller (following a condemnation) in the chain of title can be a tip-off. 

Don't panic - just don't cut corners if your Phase One indicates your cheap property is being handed to you at a dollar down and a dollar a week for a reason. Good luck.