Environmental Report Fails

Third potential blog killer: a failed Environmental Phase 1.

Tim Milazzo
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Growing up in Northern New Jersey, especially in that upper right quadrant of the state, is essentially growing up in the suburbs of New York City. I grew up there in the1990s, which meant a couple of things:

First, ecommerce was still in its infancy. People still bought 99.99% of goods at physical stores. So as my suburban community grew out of the excess of jobs and money from New York, the retail scene grew along with it.

Second, there were no smartphones yet. So when I took trips with my parents in the car, I wasn’t staring straight down at a screen, I was looking up and out the window. I used to look at the stores we passed on the highway, construction sites, and talked with my siblings about what they might be building.

I distinctly remember a major intersection leading onto our closest highway (Route 23) that had a diner, two retail buildings, and a gas station on its four corners. At one point, the gas station closed up and was torn down. This was a prime piece of real estate in my 9 year old opinion — we drove past it all the time, as did ten thousand other cars per day. I wondered what they would build there next.

Then the property sat vacant. For a long time. One day I asked my dad about it — he explained that a real estate developer likely had bought the property with grand plans to use it for a new purpose, but it’s never a good idea to redevelop an old gas station.

Why not?

There’s always going to be something wrong with the soil. Regulators are strict when it comes to finding some leakage from old gas tanks, so you won’t be able to get your project started, and it will be expensive to remediate.

How Environment Reports Kill a Deal

Every regulated lender across the board requires an Environmental Report before they will extend a mortgage on any commercial property. An expert will visit the property, test the soil, and check any structures for environmental hazards that can be detrimental to either tenants or the local ecosystem. That first visit and tests will result in a Phase 1 report — essentially a checklist of common problems and whether the property has any identified problems.

If any problems come back on the Phase 1 report, then you get to the dreaded Phase 2. At this point, your deal can already be impacted. The mere presence of a Phase 2 means extra time (months) added to your closing process. If you need to close by a certain date for whatever reason (taxes, contractual concerns, whatever), this is not welcome news. The Phase 2, in addition to added time, will bring with it a more detailed explanation of how bad the environmental problems are, and the steps to remediate them, which can be costly. If you have an old tank in the ground that has already, or may, leak oil, you need to have it removed and the soil cleaned up. It’s not quick or cheap.

The timing and the cost of environmental remediation can both change the outlook on a deal. Even a patient investor looks at the overall cost to achieve the project as a key decision point in moving it forward. This can definitely be a deal killer, so choose your acquisitions and development sites wisely, and research the history of the property before you get too deep.

In case you were wondering about that old gas station on the corner. It’s a 7 Eleven today with no fuel service.

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