Ten Years After Accepting A Phase One Environmental Site Assessment I Realized That It Was A Mistake That Could Cost Me Millions

I'll be honest. When I ordered my first phase one environmental site assessment in 1995, I new very little about the process and the scope of its importance. At the time, this was an area of real estate investment that was just starting to be paid serious attention. And although it has only been a little over ten years since then, environmental contamination (even of residential property) has since become a major issue.

Back then I recall thinking that this report, that the mortgage company was demanding, was just a formality. No phase one environmental report, no mortgage. So I paid the $2,500 to an environmental consultant, and received my report. In the end the mortgage company was satisfied with the report, and therefore I was happy. I got the mortgage and bought the building (a mixed commercial property). End of story. Or so I thought...

Years went by. Ten in fact. And then I decided to sell the building.

As part of the contract the purchaser requested copies of any old professional reports that I had in my possession that pertained to the property.

  • engineering reports
  • appraisals
  • phase one environmental reports
  • etc.

No problem I thought. I went back to my files and pulled out the old reports (including the phase one environmental report). It had been over ten years since I had read many of them so I decided to reread them to refresh my memory. Just in case the purchase needed clarification on anything.

As I read through the old phase one environmental assessment something didn't seem quite right. And then my heart skipped a beat. You see, I had vaguely remembered that the report had mentioned something about an old gas station that had been located on the lot to the north of my property. The station had been closed for several years before I purchased my property and all of the buildings and gasoline storage tanks had been removed. What I hadn't remembered was the fact that at some point in the early 1980's, several of the UST's (underground storage tanks) were replaced due to leakage! In 1995, when the report was completed, the consultant gave his opinion that the risk of contamination to my site (the adjoining property to the south) was negligible. But now it was 2005.

As I mentioned above, things changed quite dramatically over that ten-year period with respect to environmental issues. In today's real estate investment climate, just the fact that the property lay adjacent to a former gas station would be reason enough to order a phase two environmental site assessment. (For a more in depth discussion of environmental site assessments, the different phases and what exactly is involved, you may want to read this article, phase 1 environmental assessments and reports ). The fact that there had been leaking UST's on the adjacent site would seal the deal so to speak. But a phase 2 assessment was not recommended, nor performed when I purchased the building. Now there stood a chance that in fact my property was contaminated.

Let me explain exactly what I was faced with all of a sudden.

If in fact the gas that had leaked 25 years earlier had found its way onto my property, the ramifications would have been enormous. Not only would the building, valued at close to $3 million be instantly worthless, I and/or my company could potentially be on the hook for the clean up costs. I shuddered to think what they would amount to.

Sidebar: Leaking storage tanks at gas stations are a major source of environmental contamination. And it is not just the property that the gas station is located on that is at risk. Depending on the type of soil, presence of groundwater etc. the contamination can literally spread for many city blocks. At the time my lawyer relayed to me that his firm was involved in a remediation case where the contamination from one gas station covered six city blocks.

It was no surprise to me when the purchaser's environmental consultant recommended a phase two assessment of the property. Phase one environmental assessments do no involve any physical testing of soils, building materials etc. When you move to phase 2 assessment, physical testing is involved, and the costs start to escalate. In this particular situation, the testing required the boring of several holes along the property line that separated the two properties. The soils were then tested for the presence of contaminants to see if in fact any of the gasoline had "migrated" to my property.

Now, you may be thinking to yourself at this point that because the contamination took place on the neighboring property, it would be their responsibility. That was my first thought as well. And believe me I went through all the potential scenarios in my head while I waited for the phase 2 to be completed. The first thing I had to determine was who owned the property. In this case a large oil company still owned the property. At least that was good news. Had the property been owned by a franchisee of an oil company (which is quite common) I would have likely been out of luck if I had to pursue them legally. You know the saying "you can't get blood from a stone". Anyway, I crossed my fingers and waited for the final report.

Luckily it was all clear. But believe me I "sweated" it out for a few weeks.

What can you learn from this?

Whether it's a phase one environmental report, an engineering report, an appraisal etc. make sure you are comfortable with what is presented in the report. I'm not saying that you have to question everything in them, but remember whose "behind" is on the line in the end. That's right. Yours! Don't be afraid to get clarification on something at the very least.

10 years later it may be too late...

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