Episode 53: Understanding Phase I Environmental Reports

Building Passive Income

00:00 / 00:15:18

Episode Description

Environmental issues can destroy a deal and create serious financial risk.

In this episode of Building Passive Income, CREI Collin explains how Phase I Environmental Assessments work, what they look for, and how they help protect you from environmental liability.

Learn how to read a Phase I report, identify recognized environmental conditions (RECs), and decide when to move forward, renegotiate, or walk away from a deal.

What You’ll Learn

What a Phase I Environmental Assessment (ESA) is
Why a Phase I is critical during due diligence
What a Phase I report includes
How to read a Phase I step by step
What recognized environmental conditions (RECs) are
When a Phase II Environmental Assessment is required
What to do if contamination is identified
Typical costs for Phase I and Phase II reports

Key Takeaways

What is a Phase I Environmental Assessment?

A Phase I Environmental Assessment, or Phase I ESA, evaluates a property for potential environmental contamination.

It is performed by an environmental consultant who researches the property’s history, inspects the site, and reviews environmental databases.

The goal is to identify recognized environmental conditions (RECs), which indicate the presence or likely presence of hazardous substances or petroleum products.

What a Phase I Includes

A typical Phase I report includes:

Site visit and inspection
Historical research (maps, aerials, permits)
Regulatory database search
Interviews with owners, tenants, or local sources
Final report with findings and identified risks

Why You Need a Phase I

Helps identify environmental risks before closing
Often required by lenders
Supports informed investment decisions
May help qualify for liability protections under federal law when completed properly
Reduces the risk of unexpected cleanup costs

What a Phase I Looks For

Petroleum Products
Underground or aboveground storage tanks, gas stations, and auto-related uses.

Hazardous Substances
Dry cleaners, industrial uses, manufacturing, and landfills.

Asbestos
Common in properties built before the 1980s.

Lead-Based Paint
Common in properties built before 1978.

Mold
Often linked to water damage or poor ventilation.

Radon
A naturally occurring gas that may require separate testing.

Nearby Contamination
Issues from adjacent properties that may impact your site.

Note: Some items like asbestos, lead, and mold are often considered non-scope items and may require separate evaluations.

How to Read a Phase I Report

Step 1: Review the Executive Summary
Look for a clear conclusion. “No RECs identified” is the ideal outcome.

Step 2: Review Identified RECs
Understand each issue, why it matters, and recommended next steps.

Step 3: Review Historical Use
Past uses like gas stations or dry cleaners increase risk.

Step 4: Review Regulatory Database Results
Listings on environmental databases may indicate contamination concerns.

Step 5: Review Site Observations
Look for signs such as staining, odors, or abandoned equipment.

What is a Phase II Environmental Assessment?

If RECs are identified, a Phase II may be required.

A Phase II involves testing such as:

Soil sampling
Groundwater testing
Laboratory analysis

This confirms whether contamination exists and how severe it is.

What to Do If Contamination is Found

Option 1: Walk Away
If risk or cost is too high.

Option 2: Negotiate Price Reduction
Adjust purchase price to reflect cleanup costs.

Option 3: Require Seller Remediation
Have the seller fix the issue before closing.

Option 4: Environmental Insurance
Transfer some risk through insurance, depending on coverage.

Common Environmental Issues

Underground storage tanks (USTs)
Gas stations and fuel storage
Dry cleaning operations
Industrial use history
Asbestos in older buildings
Lead-based paint
Mold and moisture damage

How Much Does a Phase I Cost?

Small properties: typically $2,000 to $4,000
Larger properties: typically $4,000 to $8,000+

Phase II costs:

Typically $10,000 to $50,000+, depending on scope

Episode Highlights

[00:00] Why environmental issues can kill a deal
[02:00] What a Phase I Environmental Assessment includes
[04:30] Step-by-step guide to reading the report
[07:30] Understanding RECs and environmental risks
[10:00] When to move to a Phase II
[12:00] Options if contamination is found

Resources Mentioned

Episode 52: Property Condition Assessments (PCA)
Episode 54: Deferred Maintenance – The Hidden Deal Killer
Episode 55: Capital Expenditure Planning

Let’s Talk

Have questions about environmental due diligence or risk? Connect with our team today: https://calendly.com/shelbi-creipartners/30min

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Episode 54: Deferred Maintenance – The Hidden Deal Killer

Disclaimer

This podcast is for informational purposes only and should not be considered financial, legal, or tax advice. Always consult with qualified professionals before making investment decisions.