Who should perform (and who should pay for) the Phase I environmental site assessment? Is it the buyer of the property? Or is it the seller? Or is it the lender? Omni Environmental Group gets this question all the time.
The answer is…it depends. Any of these 3 parties can do the Phase I. And each of them has their own motivation. Let’s look at each individually.
The seller: We tend to see this less frequently than the buyer or the lender. The primary motivation is to make the property more marketable. This is especially true on higher risk properties – think gas stations, dry cleaners and industrial properties. Phase I’s on higher risk properties are most likely going to find Recognized Environmental Conditions that require follow-up soil or ground water testing. In some cases, especially with smaller properties, the deal isn’t big enough to motivate buyers to invest the kind of money up front that soil and ground water testing requires. As a result, sellers may do the assessment to make the property more attractive to a wider range of potential buyers.
The lender: The lender frequently arranges for the Phase I to be performed. Generally, the larger the lender, the more likely this will be. Lenders usually have staff who are knowledgeable in the ASTM International Phase I standard, they may know industry practices, they may have their own internal standards and they may have Phase I consultants with whom they’re comfortable. Their motivation is typically their own future financial interest in the property. The lender wants to make sure the property isn’t contaminated to the extent that they wouldn’t be able to recover the amount of their loan if they were forced to foreclose on the property. The lender may initially pay for the Phase I but, if the deal goes through, the Phase I is part of the closing costs paid by the buyer.
The buyer: It’s also common to see the buyer arrange for the Phase I to be performed. Often, the reason the buyer seeks out a Phase I is because the lender says they need one! This tends to be the case more with smaller local and regional lenders. Sometimes we see buyers performing the Phase I simply because they want to know that the property they’re getting is not contaminated and that they’re not buying someone else’s problem (smart buyer!). A buyer may also want to look at potential liabilities that aren’t included in the standard Phase I ordered by a lender. These may include things like asbestos or PCBs in building materials. Both of these may not concern a lender and are outside the scope of the ASTM International Phase I standard. However, they may significantly affect a buyer’s ability to renovate a building or sell a property in the future.
Parties involved in the transaction should keep in mind the motivating factor for doing the Phase I. If a seller performs it, the buyer and lender may want to get their own expert to review the data and validate the seller’s conclusions and opinions. If the lender has their consultants provide the Phase I, buyers should remember that the lender’s interests and risk tolerances may not necessarily be the same as their own. For example, the buyer may be concerned with potential problems which are smaller than those which would concern a lender.
There are many reasons for doing a Phase I. Any party in the transaction can do the Phase I and any party can address any identified Recognized Environmental Conditions. Who does it and who pays are often open to negotiation and are all part of the deal!.