The Real Dirt on Environmental Reports: What is a Phase 1?

Ever heard the phrase, “Know where the bodies are buried”? In commercial real estate, a Phase I (aka Environmental Survey) is the metaphorical shovel. Lenders often require environmental assessments for certain property types (industrial and land). Buyers order them to avoid liability. Tenants sometimes order them because the landlord doesn’t always know the full story, or they don’t want to be liable for a future discovery they didn’t cause. Having a clean Phase I report can provide you with the confidence to proceed with a transaction. A messy one might save you from a very costly surprise.

A Phase I typically involves environmental professionals going through records, historical photos, and old site uses to make sure there aren’t any hidden issues. It’s not glamorous, but it’s a lot better than discovering your dream site used to be a fuel depot or a dry-cleaning operation that didn’t believe in spill trays or is adjacent to a chicken farm operation.

Now if a Phase I report comes back recommending a Phase II, things can get more costly. A Phase II typically entails soil and water samples. Sometimes the findings can lead to remediation or having monitoring wells placed on a property.

The last two transactions I worked on had environmental concerns. The first had a leaded fuel tank underground in the past. The tank was removed in 2005. Soil samples were taken during removal and recorded with the State of New Mexico. The most recent transaction had a few environmental issues dating as far back as the 80s. Two of the cases had already received a No Further Action (NFA) status from the State of New Mexico. Another case is pending a final review to move it to NFA status. Environmental issues can potentially expose you to liability, but they don't have to be a deal killer. 

 - New Mexico Environmental Department Public Records: Click Here
 - New Mexico Petroleum Storage Tank Regulations: Click Here

Written by: Ben Nolte, CCIM