Bill Decker clearly remembers the time a Missouri bank failed to do its homework, and the lack of foresight cost the financial institution 10 times its original property investment.
"This local bank had loaned money for the purchase of some land," says Decker, regional manager for e2M, an environmental management assessment service in Jacksonville, Fla.
"The note was for $100,000. The signee failed on the note, so the bank foreclosed. When they went to sell, they found the land had lead contamination. It had been formerly used as a shooting range."
That mistake cost the bank more than $1 million in clean-up costs, Decker says, since the bank technically owned the land.
What the bank should have done, prior to loaning the money or prior to foreclosing, is hired a company to perform an environmental audit.
"That's almost an industry standard now," says Steve Wennerstrom, managing broker, RE/MAX Commercial Services, Denver, Colo. "It's the most fundamental part of due diligence."
Scratching the surface
| "If it is farmland, you want to make sure it was farmland 10 years ago. You want to make sure it wasn't converted to farmland from the Rocky Mountain Arsenal."
-- Steve Wennerstrom, managing broker,
RE/MAX Commercial Services, Denver, Colo. |
Environmental assessments of commercial properties -- be they greenfield or brownfield -- are labeled Phase I, Phase II, and Phase III.
In short, Phase I is a visual examination by trained specialists, Phase II is actual testing of the ground and water sources, and Phase III is remediation of the land if problems are discovered.
"Even for virgin ag property, you need to be cognizant of how that property has been used," says Decker. "Maybe a farmer had an underground fuel tank. Those liabilities could still be there."
Commercial property buyers should think of it as insurance.
"You don't want to find out when the first bucket load comes up with a 55-gallon drum," Decker notes.
Besides a detailed visual inspection, Phase I audits also include digging deep into all available public records in order to learn about the property's past. Specialists also visually survey surrounding properties, since their potential liabilities could be disastrous, even if the prospective property has a clean bill of health.
Kevin Binkley, project manager for Environmental Audit and Compliance, Inc., Edwardsville, Kan., says his firm does a 50-year title search of properties to find all past owners.
"If you find out Amoco was once listed as the owner, it may have been a service station," Binkley says.
His firm also checks government records found at city halls and county courthouses as part of Phase I, as well as interviewing past property owners and viewing past real estate appraisals on the land.
Another popular method of looking at a property's history is to view aerial photos, past and present, and compare any differences.
"If it is farmland, you want to make sure it was farmland 10 years ago," says Wennerstrom. "You want to make sure it wasn't converted to farmland from the Rocky Mountain Arsenal."
If structures are on the property, liabilities such as asbestos, lead in paint, PCBs, lead pipes, or radon in basements are sought out.
Any type of chemicals used, be it herbicides on crops or cleaning agents in a dry cleaning business, are investigated.
Specialists look for signs of discarded septics or underground storage tanks, sometimes revealed by vents, pumps and piping.
Even if a property is old and changed hands frequently, tell-tale signs often still exist.
"Let's say you have a nice corner lot in downtown, and there's curbing along the road but no one really knows why. You don't see any service islands, but there are vents in the building. It could be a service station with underground tanks," Decker says. "If the grass doesn't grow, it could mean surface contamination."
Phase II: examination
| "Everyone is so environmentally conscious nowadays. Most companies are going in with their eyes wide open. They're building that cost (of the audits) into the negotiation price."
-- Bill Decker, regional manager, e2M, Jacksonville, Fla. |
Once an environmental assessment company completes Phase I, the prospective buyer has the option of pursuing Phase II, which involves actual soil samples, water sampling, and floor and ceiling samples from an existing building.
"Most of the time, if there's nothing uncoveredin Phase I, companies will stop there," says Binkley."There's always the potential that something isn't seen, but a lot of times, companies aren't worried about that. In that case, in our report, we'll say Phase II is optional."
Phase II determines how bad a problem is. The amount of testing entirely depends of the size of the property and the extent of damage.
The prospective buyer at that point may be dealing with more than one assessment company, as one may specialize in water sampling, while another specializes in asbestos testing.
Audits: worth every cent
| Three Levels of Environmental Assessment
-
Level 1: Preliminary review (site visit, title review,
and discussions with area residents). Typical costs are
$1,650 to $2,250.
-
Level 2: Additional investigations and on-site
samplings due to possible contamination
Typical costs are $20,000 to $30,000.
-
Level 3: Site remediation and clean-up (includes everything from underground storage tank removal to a federally-designated Superfund site clean-up costing $150 million).
|
Once the problem is sized up, Phase III -- the actual clean-up or even demolition of a structure -- begins.
This brings the property into full compliance with all government and environmental regulations, and restores it back to public and private use.
The cost of an environmental audit makes it a worthy investment. A recent national survey showed the average Phase I cost at $1,650 to $2,250. Phase II can get into five-figures, depending on the amount of various tests conducted.
"Phase III, well, the sky's the limit," says Decker. "Clean-ups can literally bankrupt a corporation."
Because of that, environmental audits are almost mandatory today.
"It's a wise investment to bring in a professional," says Decker. "It's pennies on the dollar. I don't fix my car, or if my kids get sick, I don't try to make them well. I go to a professional."
Binkley says that the buyer isn't always the one stuck with the audit bill.
"Who pays is negotiable," he says. "Sometimes the buyer and seller will split the cost 50/50."
Wennerstrom says he doubts prospective buyers can even get a loan on a property without an environmental audit. Binkley agrees, noting that too much money is on the line.
"Banks are very proactive in this area because they're putting their funds at risk," he says.
"Everyone is so environmentally conscious nowadays," adds Decker. "Most companies are going in with their eyes wide open. They're building that cost (of the audits) into the negotiation price."
He says anyone who isn't following this practice is taking a huge gamble.
"If you're not exercising due diligence, you're rolling the dice," Decker says. "You may be better off going to Vegas."
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