Generally in the course of a commercial real estate transaction, buyers are required by their lenders to show they’ve performed their due diligence. Part of this due diligence is hiring an environmental consultant to perform a Phase One Environmental Site Assessment (ESA).
The ESA reports focus on the potential for soil, groundwater, and vapor encroachment contamination. And, if any red flags show up, they lead to remediation requirements and a budget for Phase Two.
But, sellers should not take the potential buyers’ Phase One report as truth without outside verification. As with any transaction, information provided by both parties ultimately impacts the final purchase price. And, environmental reports can and will be used in these negotiations.
Buyers obviously want to pay as little as possible for a property. They often use a Phase One report as leverage to create downward pressure on purchase prices and to push development and constructions costs onto sellers. Sellers without their own environmental consultants may make unnecessary financial concessions to buyers.
Ultimately everything comes down to a negotiation and buyers and sellers ultimately find a deal they are most comfortable with. But an environmental consultant can help a seller maximize their sale price by providing outside verification of a buyer’s Phase One report. The seller’s consultant will be able to advise on the nuances of the available options for remediation and make it clear what is and is not the seller’s responsibility.
The best analogy here is to compare a Phase One report provided by a buyer to a Contract to buy a property provided by the buyer. A seller would not just take that Contract and sign it as is. Instead they would send it to their own attorney to review before signing. The same thing should happen with environmental reports.
And, of course, to avoid any conflict of interest, the buyer and seller should hire different environmental consultants. Many times at MECC we have been approached by sellers after they’ve received the Phase One report from a potential buyer we have worked with. But, we always recommend they contract their own consultant to get independent verification.
Have a question about how Phase One reports impact commercial real estate negotiations, feel free to contact us!