When looking at a park purchase, is it always necessary to order/pay for a new survey and phrase one reports even though it is a small park in metro areas like SO CA.
Should I always ask the seller first (or agent) for those recent reports if they are available? If not available, it is practical to ask the seller to pay for those, or maybe split the costs. In case of master lease option, do I need to get these reports first or wait till ready to exercise the option? Thanks
No, it is not necessary to do a survey or Phase 1, but you may be foolish not to. At least get a boundary survey. Sometimes there are surprises. If it is a simple property, and you can follow the deed and maybe there is a prior survey, and the lender isn’t requiring one, then maybe you can forgo the survey. If the park is being split off from a larger parcel, definitely get a survey. See if you can get the seller to pay for it and write it into the contract. Saved me a bundle when problems cropped up. As for a Phase 1, the cost is about $2000. Most will say, don’t leave home without it. If there is a ever a problem, you will be liable for big bucks even if you sold the property ten years ago. Who knows what may have been going on in 1950 on that property-buried oil tank spill, agricultural chemicals, machine shop. I hate to spend the money, but will sleep better. When ever you buy, you have to get a new Phase 1 to protect yourself. Seller doesn’t pay for Phase 1. Sometimes the lender requires it.
I’ve been involved in commercial finance for several years, and I don’t know of a commercial lender, or any intelligent hard money lender, who would not require a recent, repeat, RECENT, Phase I report for several reasons. First, the Phase I will show if a Phase II study needs to be done. The Phase II report will be very expensive. Seceond, if a Phase II report is required, that means the person inspecting found indications of possible serious comtamination. A Phase II study will require drilling soil samples throughout the property and study of all samples pulled out. If a Phase II is required, I suggest you run as fast as you can from the deal. Unless you enjoy unknown risk. It’s not unheard of for contaminants to pollute ground water tables several miles away. Cleanup will be bare minimum $50,000 - 100,000 and often add a zero or two. (That doesn’t count your legal costs.) That’s why a Phase I is so valuable.
Also, if the lender lends money without the Phase I and contaminants are later found, the lender can be one of the parties on the hook for cleanup.
thanks for this comment
We just bought 3 commercial properties, one with a conduit loan (very rigorous underwriting involved) and none of the lenders required a phase I. I was also under the impression that a Phase I was a necessity, but after talking with a firm that performs these studies, I was convinced that it’s more of an insurance policy than anything else.
The way I understood it, they simply look at the parcel history and neighboring parcels’ history and use and determine the liklihood that contamination has taken place. If that history indicates a possibility, then the Phase II is ordered.
James, definitely ask the seller for all reports and surveys that pertain to the property. Reviewing those documents is an important part of the due diligence. As for asking for the seller to pay those costs - by all means ask! You never know what you’ll get. I’ve noticed that different regions vary as to what costs are usual and customary to the seller.
Lin
The lender is the one that makes the final determination on this, as they share the liability. I worked a deal that had a phase I done that was acceptable to the buyer, but the lender balked. Long story short, the deal eventually closed, but only after enough additional tests were done to satisfy the lender. In addition, the portion of the property that was in question was surveyed off & bought under a separate corporate entity. Lenders just don’t like any exposure to this kind of problem.
There is a limited defense under the environmental liability laws for a purchaser who in good faith conducts a competent phase 1 that finds no basis for further inquiry. (You Need to conduct your OWN phase 1; NOT accepting an old one. You NEED to do this when you buy it, NOT later. This is a VERY NARROW exception—you want to be protected by it.).
If your phase I report indicates a credible factual basis for environmental phase 2 testing, then you would also need to do that to qualify for this defense.
These environmental liability laws are probably the scariest form of liability on the planet—the fact that you are absolutely faultless is NO defense—it is a form of status liability. Your status as owner (or long term lessee) can make you absolutely liable. Once you get a PRP letter from the EPA, the party’s pretty much over, unless you can causally prove that your land
isn’t the cause (Which will costs you more in experts than you can possibly believe. Plus, trying to causally sort out the source of pollution is frequently impossible—Good Luck. If you contributed one teaspoon of pollution and another polluter contributed 30 dump trucks—Guess what? If the 2 are mixed together and can’t be separated—which is usually the case—then both of you are equally liable.). The fact that someone else originally caused is usually irrelevant—they are typically judgement proof and out of the picture—unless you have performed the Phase 1 (and/or Phase 2) and can assert this as a defense. Otherwise, you’re toast.
And no lender will even consider lending any money without a competently performed phase 1. If you wait to refinance, then you will probably need another one (depending on how long) when you refinance.
Lenders are (rightfully) afraid of environmental liability. If you ever plan to sell your park, you’re going to need it anyway. Unless you are absolutely certain you will never need to sell or refinance the park as long as you live (and how can you be?), I think you pretty much need it.
BTW, if you get enhanced title coverage with an ATLA policy, the fact that you have a survey of the property, can actually serve to increase your title
coverage. (Certain coverages ONLY apply if have a survey.) IMHO,
a CTLA policy may be sufficient for a house, but for a commercial property of any real value, you really want ATLA (or an enhanced title policy available in your jurisdiction). Although I would have to say that having a Phase 1 is far more important than the survey.
In some places I have practiced (e.g, Dallas), a survey was required in ALL residential transactions.
Post Edited (10-23-07 14:30)
Thank you all for your great advise. I will get both p1 and survey.
Happy Halloween…boo!