ENVIRONMENTAL: An environmental checklist for purchasing real estate

Property purchasers are led to believe they need to carve a property into Swiss cheese to gather enough data to determine whether the property is contaminated. Make sure your consultant focuses his or her investigation only on those areas that are recognized environmental concerns in Phase I.

You thought you did everything right. You carefully drafted your purchase agreement to include environmental contingencies, hired an environmental consultant and did your inspections. All set, right? Maybe not.

Environmental inspections of real estate prior to purchase became commonplace after lenders, tenants, and business owners found themselves the unwitting target of cleanup enforcement during the mid to late 1980s. Claims of innocence for contamination rang hollow to state and federal regulatory agencies who were armed with a statute which assumed you were guilty of pollution if you owned or occupied the property during the period of pollution. Thus, the era of environmental due diligence was born.

Part of the process of conducting environmental due diligence prior to acquiring real estate truly depends on how much diligence is due. Frequently, a call to an environmental contractor or consultant will result in you purchasing more environmental service than you really need unless you know which questions to ask. The following is a good thumbnail sketch of determining how much due diligence is necessary to qualify for defenses or exemption to environmental liability under state and federal law.

If the property which you seek to acquire was never utilized for any purpose, or was only used as a residence, it may be appropriate to only conduct a transaction screen on the property, instead of the more expensive Phase I Environmental Site Assessment. A transaction screen will typically analyze prior uses of the property and make determinations as to whether recognized environmental conditions exist or existed on the property sufficient to warrant additional investigation. A transaction screen should cost approximately $600 to $800. Check around as prices and competence will certainly vary from consultant to consultant.

If the property was utilized for a commercial purpose (including farming), then a Phase I Environmental Site Assessment should probably be conducted. Make sure the consultant you hire for the assessment provides a Phase I which is consistent with the recommendations of the American Society for Testing and Materials (ASTM). This will help to make sure that you are comparing apples to apples when calling for estimates.

A Phase I will typically be a more detailed analysis of prior usage of the property and adjoining properties, including records research, title history searches and extensive interviews with persons familiar with the property. A Phase I from a reputable consulting firm will generally cost about $1,500 to $2,500.

If the Phase I indicates that soil and/or groundwater testing is needed, a Phase II Environmental Site Assessment will be recommended. Paramount in the Phase II is that the scope of the investigation looks at only the areas of recognized environmental conditions.

Frequently, property purchasers are led to believe they need to carve a property into Swiss cheese to gather enough investigation data to determine whether the property is contaminated. Make sure your consultant focuses his or her investigation on only those areas which are recognized environmental concerns in the Phase I.

Costs for a Phase II will vary widely, depending on site conditions. Analytical parameters, depth to ground water, soil characteristics and other site specific conditions will make it difficult to determine the cost of the Phase II. However, it would be wise after you have received the scope of services and cost estimate detail from one environmental consultant to compare them with similar services provided by other contractors.

If the Phase II does indicate that the property has contaminated soil or ground water above regulated criteria, the purchaser must then decide whether to move forward with the transaction. Hopefully, the purchaser has had constructed within their purchase agreement an option to abandon the transaction should contamination be discovered. If the purchaser decides the property has value, notwithstanding the contamination, the purchaser must then have the Phase II Environmental Site Assessment formatted into a Baseline Environmental Assessment (BEA).

A BEA may require additional investigation beyond the Phase II, depending upon whether the purchaser intends to use hazardous substances on the property similar to those discovered.

There are three categories of BEAs which have varying costs, depending on the level of investigation necessary to show that hazardous substances connected with the purchaser’s use of the property are distinguishable from those pre-existing at the property. Frequently, if the purchaser doesn’t intend to use hazardous substances or will use hazardous substances different than those discovered on the property, there should be only marginal additional costs associated with reformatting the Phase II into a BEA.

Finally, it may be appropriate to employ experienced environmental counsel once it is determined that the property you intend to acquire or sell contains hazardous substances. In any acquisition of property, purchase only the diligence you need and shop around.

Joseph Quandt is an attorney with the Traverse City offices of Smith & Johnson Attorneys, PC. His practice focuses on environmental and business matters. This article does not provide, nor is it intended to provide, any legal advice regarding any particular situation or subject.