Episode 56: Phase II Environmental Assessments

Building Passive Income

00:00 / 00:20:52

Episode Description

Environmental issues can create serious financial risk and significantly impact your investment.

In this episode of Building Passive Income, CREI Collin explains when a Phase II Environmental Assessment is required, what it includes, and how it helps you confirm whether contamination actually exists.

Learn how to evaluate Phase II findings, understand remediation costs, and decide whether to move forward, renegotiate, or walk away from a deal.

What You’ll Learn

What a Phase II Environmental Assessment is
When a Phase II is required during due diligence
What a Phase II includes
How to interpret environmental findings
What to do if contamination is discovered
Typical costs for testing and remediation
How environmental risk impacts underwriting and financing

Key Takeaways

What is a Phase II Environmental Assessment?

A Phase II Environmental Assessment is a follow-up investigation used to confirm whether contamination exists on a property.

It is typically recommended when a Phase I identifies recognized environmental conditions (RECs). A Phase II involves physical testing to determine if hazardous substances or petroleum products are actually present and to what extent.

When You Need a Phase II

A Phase II may be required when:

A Phase I identifies recognized environmental conditions
Nearby contamination may impact the property
Lenders require additional environmental testing
You are planning major renovations or redevelopment
The property has a history of higher-risk uses

What a Phase II Includes

A Phase II typically includes:

Soil sampling at multiple depths
Groundwater testing through monitoring wells
Laboratory analysis for petroleum products, VOCs, and heavy metals
A detailed report with findings and recommendations

What to Do If Contamination is Found

If contamination is confirmed, you have several options:

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

Option 2: Negotiate a Price Reduction
Adjust the purchase price to reflect remediation costs.

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

Option 4: Environmental Insurance
Transfer some of the risk through insurance.

Option 5: Implement Controls
Use institutional or engineering controls to manage the risk.

How Much Does a Phase II Cost?

Basic Phase II: typically $10,000 to $20,000
Standard Phase II: typically $20,000 to $40,000
Comprehensive Phase II: typically $40,000 to $100,000+

Remediation costs can vary significantly:

Soil remediation: $50 to $200 per ton
Groundwater remediation: $100,000 to $500,000+
Underground storage tank removal: $20,000 to $100,000 per tank

Red Flags to Watch For

Contamination exceeding regulatory limits
Widespread contamination across the site
Groundwater contamination
Unknown contamination sources
Regulatory involvement or oversight
Off-site contamination impacting the property

How Phase II Findings Impact Your Investment

Environmental findings directly impact your underwriting and risk profile.

They can affect your ability to finance the deal, increase your capital requirements, and limit your exit options. In some cases, they can completely change the viability of the investment.

At CREI Partners, environmental risk is not ignored. It is identified, quantified, and factored into every investment decision.

Episode Highlights

[00:00] Why environmental risk matters
[02:00] When a Phase II is required
[04:30] What a Phase II includes
[07:30] How to evaluate contamination findings
[10:00] What to do if contamination is found
[12:00] Costs and red flags to watch

Resources Mentioned

Episode 53: Phase I Environmental Assessments
CERCLA All Appropriate Inquiry standards
Environmental insurance options

Let’s Talk

Have questions about environmental due diligence or evaluating risk in a deal?

Schedule a call with our team:
https://calendly.com/shelbi-creipartners/30min

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Next Episode

Episode 57: Title Commitments and Surveys – What You Must Verify Before Closing

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.