Chances are you will come across a site with environmental issues at some point in your investing career—if you have not already. These can be tricky situations, so in general, the more information you have, the better off you are.
To find out more about what investors should watch out for, members of the Forbes Real Estate Council recommend what people should keep in mind when considering sites that may have these kinds of problems—potential or otherwise.
1. Beware Of The Impact On Financing
Environmental issues can drastically reduce options for debt financing. Lenders order a phase one report as part of their due diligence. If there is an issue, they might continue with phase two. This itself will delay securing a loan for weeks. Lenders get easily spooked and might renege on a term sheet. As a result, you might lose an opportunity. The worst case is when you can’t refinance.
2. Figure Out Liability
The most important items for an investor to consider in assessing environmental issues when purchasing a warehouse investment are understanding if it is clear who the liable party is within the chain of title, assessing worst-case scenario clean-up costs, and assessing exposure to liability by neighboring properties, residential homes and public venues.
3. See If It Can Be Cleaned Before Purchasing
Understand that you are often at the mercy of a government agency to clean up or certify the project as “healthy.” I would try to get it cleaned up and blessed by the EPA or whatever before purchasing. Until that happens, I would stay away and, depending on the severity, I might cross the site off of my list of potential acquisitions.
4. Don’t Give Up Your Contingencies
It’s very popular to waive contingencies in your offer in a hot market. However, if there’s a good chance there are environmental issues on the property, don’t do it! They can cost millions to remedy and need to be properly investigated.
5. Hire An Environmental Engineer
Hire the best environmental engineer you can find. Strategize with them about whether it makes sense to reach out to the environmental agency overseeing the site. Maybe you can work collaboratively with the agency to get the site remediated.
6. Conduct A Phase Two Assessment First
What are the issues? Conducting a phase two environmental site assessment can help you locate and evaluate areas of concern. These are specific problem areas that may need to be cleaned up before you make a purchase. After a phase two, the seller may either pay for remediation or discount the property adequately. Or, you may walk away if the exposure outweighs the return.
7. Research Thoroughly
Prior research is important, as you should have an understanding of the specific toxins present. Develop an action plan to determine how to remove the contamination and the involved costs. The properties should have environmental docs available, which may be available at your state’s environmental protection agency. Find a reputable environmental engineering or remediation company that can perform analysis of the site.