Environmental Assessments: What is this Phase 1, 2, 3?

If you’re an investor or lender interested in commercial property, you’ll want to be sure to investigate whether a property has contaminants in, on, or underneath it. (While any real estate can be contaminated, commercial properties are far more susceptible than residential properties.)

Exposure for single-family homes is typically a buried fuel oil tank that leaked, asbestos in a popcorn ceiling or siding, or lead-based paint. While all of these can be issues for a homeowner, they’re not nearly as serious as industrial waste products that can cover a broad spectrum of contaminants which can cost much more to address (called remediation). On lower end of the danger scale, there’s fuel from an oil tank or asbestos in ceiling tiles; on the higher end, there’s heavy metals from an industrial process disposed of in an environmentally harmful way.

This doesn’t necessarily mean illegal activity (at the time it was done), or even unusual activity—common practices in bygone eras weren’t always good for the Earth. For example, many ranchers used the waste oil from farm equipment to pour on dirt roads to keep dust down. It was also common for service stations and auto repair shops to use waste oil to keep weeds down behind their buildings. Another harmful practice was a private garbage dump on remote properties.

Add to that the inadvertent release of things like gasoline from a leaky tank, or solvents headed to a storage tank through a leaky pipe, and you have the opportunity for a serious environmental problem, as well as a paperwork storm and a financial headache of incredible magnitude.

And these more significant and costly contaminants are far more likely to be found on industrial, commercial or even ranch property. For investors to reduce their exposure to these issues, they order a thorough assessment and potential remediation of the property. These are called Environmental Site Assessments: Phase 1, Phase 2, and Phase 3.

A Phase 1 assessment is the simplest. It consists of examining the paperwork related to a given property. It will review who owned the property and who occupied it, and to what use they put it. If the property was used as an office building, the risk of contamination is comparatively low. If it was a bulk oil plant or a dry cleaner, the risk for serious contamination increases. To make these determinations, investigators review county records, interview those familiar with the property, and investigate the ownership and use of surrounding properties. They will sometimes look at old photos to see if they are consistent with official records.

Investigators will review their findings in the context of the era— for example, a bulk oil plant operated in the 1950s and 60s when environmental concerns were nil has much greater exposure than one built today. So, a Phase 1 assessment is basically done at someone’s desk.

Next week, I’ll go into Phase 2 and Phase 3 assessments and remediation. This is definitely one of those situations where less is more. If you can stop after Phase 1, consider yourself lucky. That does not mean free. In the early 1990s I did a phase one on a property I acquired which cost about $17,000.00 to do no more than shuffle paper and that did not include my time, which was significant.

If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

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