Environmental Due Diligence: The Phase 1 and Phase 2
When buying commercial property, especially if it’s vacant land and oftentimes even when it’s not, you have to know the condition of the real estate, and that involves an environmental study.
The first step is to get the Phase 1. The Phase 1 is an environmental study designed to identify harmful environmental conditions that are affecting or may affect the property. It is essentially the first step in your environmental due diligence, and it can often determine whether or not you even proceed. The person conducting the Phase 1 will typically make a site visit, look into public records, check out the area where the Property is located, and review maps and images of the Property. Based on that, he will determine if the subject Property might have any environmental issues. For example, it might be a problem if there is a gas station next door. Or, from public records, he might figure out that while there is no gas station in the area now, there used to be a gas station next door, and there were gas tanks actually on the subject Property. Or there might be a dry cleaner on or near the Property, either now or in the past, using harsh chemicals. Or there might be some sort of automotive repair shop next door, which could be an issue. All of the above examples have actually happened to my clients, but there are other plenty of other possibilities as well.
Of course, you might luck out, and the Property will get a clean bill of health. But, in the event your Phase 1 reveals some potential issues, it’s time to move on to the next step: the Phase 2.
What’s the Phase 2? Well, it’s another environmental study, this time more invasive. The purpose of the Phase 2 is to either corroborate or deny the possibilities set forth in the Phase 1. The Phase 2 often involves soil tests, groundwater sampling, and surface water sampling. These items are then chemically analyzed to determine if there is, in fact, any environmental threat. If there is, then the buyer and seller need to determine how to proceed. Does the buyer still want the property? Can the property be cleaned up to make it compliant? How much will it cost? How long will it take? Who’s going to pay for it?
If all goes well, you will be able to inexpensively rule out environmental hazards. But if it turns out that there are issues that would limit your use of the property, it’s better to know now than after you close!