There’s an old saying that goes…
“The bitterness of poor quality remains long after the sweetness of low price is forgotten.”
Let us be honest; the market average is $2,800 to 3,000 for a Phase I ESA. There are consultants that will provide a Phase I as cheaply as $1,800, yet that reduced rate does not necessarily provide reduced risk. We know a property purchaser now going through an expensive site remediation due to shortcuts being taken in Phase I process. There are many great property opportunities here in Northern Ohio and beyond that may have contamination, yet a proper and thorough Phase I can still provide protections in owning such properties. Just like in buying a house, you want the inspector that will pull out his ladder or climb through every crawl space before you buy your home. Do the same for your business.
SO, WHAT MAKES A PHASE I A GOOD DEAL?
by Steve Kovatch
As anyone dealing with a lender knows, a Phase I Environmental Site Assessment (ESA) is required to get a loan approved for the purchase or refinancing of commercial/industrial property. Many loan seekers naively think that the Phase I is just a lender checklist item or, perhaps, primarily a vehicle for the lender to protect itself by identifying their risk in taking on a secondary position on a problem property. While the latter point is true, the key reason for a buyer to complete a Phase I is to provide themselves with a defense from a possible lawsuit by EPA for owning contaminated property. Briefly, the Phase I purchaser is completing “due diligence” in studying a property’s historical and current conditions, and this provides them with important liability protection. This protection is called Bona Fide Purchaser Defense (BFPD). There’s lots more to discuss about that, but we’ll save that discussion for another day. Let’s refocus on what makes the Phase I a good deal, now that you know how important your due diligence task really is.
Now that you know that you must be the purchaser of the Phase I to qualify for BFPD, you can understand why using the property seller’s Phase I is a nice cost savings for you (Good Deal), but potentially a disaster for your future ownership ( Bad Deal). We have had clients who followed this path and later learned that their property was contaminated, leading to not only an expensive cleanup, but also the realization that EPA could now sue them into a much larger investigation and cleanup, all at EPA’s discretion, since they lacked the BFPD defense.
Another Phase I bad deal can be selecting a consultant purely on low cost. An analogy: In doing a home addition, one likely chooses a contractor based upon the size / complexity of the addition (the risk). While the local construction handyman can adequately handle smaller jobs, does he have the experience and insurance necessary to protect your interests for the larger, high risk, project? Phase I investigations are high risk undertakings for the lender and the purchaser. The scientist or “point person” doing the Phase I had better have years of experience, so that when walking the property, or reviewing all of the historical information, so as to identify potential problems. Since it’s your due diligence and ultimate risk regarding BFPD, is your best option the low-price option? Experience in performing Phase I ESAs is like anything else – the cheapest option is likely the low-experience option. We have also been involved in re-reviewing sites (peer review) where less experienced Phase I individuals missed significant, telling signs of risk while doing the field observation work.
Ultimately, finding a Good Deal in a Phase I scenario is best done by understanding WHAT your risk is, HOW you need to handle that risk, and finding WHO is the right party to complete your due diligence on your behalf. While price is important, it should be down your list of key factors in purchasing a Phase I.