What Your Lender Wants To Know Before You Buy Commercial Property

Your lender asks one simple question before you buy: did you get a Phase I Environmental Site Assessment? That question is really about one thing: who’s stuck with the environmental liability if the property has a messy past. We walk through Phase I ESAs in plain language, why they’re a standard part of commercial real estate due diligence, and how a few hours of research can save you from inheriting contamination you didn’t cause.

We talk about what the process actually looks like, from digging through decades of historical records to identifying past uses that raise risk like gas stations and dry cleaners. We also get into the details buyers miss, like underground storage tanks, documented closures, and how groundwater gradients and street drainage can carry problems from nearby sites onto the property you’re about to own. If the clues point to a real concern, we explain when a Phase II ESA comes next and why sampling soil and groundwater changes the whole decision.

Then we zoom in on cost and negotiation. Older buildings can trigger asbestos testing or lead testing, and knowing what’s there before you remodel can mean the difference between a controlled budget and an expensive surprise. We also cover a key timing issue: many Phase I reports are only considered current for about 180 days, so each new buyer typically needs a fresh look.

If you’re buying, selling, lending, or advising on commercial property in markets like Dallas, Houston, or Austin, this is the practical guide you want before you sign. Subscribe for more, share this with a buyer who’s under contract, and leave a review with the biggest environmental question you’ve run into.

To learn more about DCG Environmental visit:
https://www.DCGEnvironmental.com
DCG Environmental 
Serving Property Owners in Dallas, Houston, and Austin 
972-876-0008 

Transcript

Welcome To The Show

SPEAKER_00 0:04

Welcome to the Environmental Testing Show. That's what you can see. Hosted by Shelly High. CEO of DCG Environmental. From all the expenses to other Of C. Serving property owners throughout Dallas, Houston, and Austin. DCG Environmental believes finding the problem is the first step to making everyone safe.

SPEAKER_01 0:41

I'm Julie Schwenzer back with Shelly Hines, our expert and CEO of DCG Environmental.

What A Phase I ESA Is

SPEAKER_01 0:48

And Shelly, big question for you. If I am a real estate buyer and my banker is asking if we did a phase one environmental site assessment, what the heck does that mean?

SPEAKER_02 1:01

That's a um, so it's a site assessment of the property that you're getting ready to purchase. And that requires um a lot of due diligence.

Researching A Property’s Full History

SPEAKER_02 1:10

So we um do a lot of historical data review. Um we'll go as far back as like 1940s and 50s, all the way back to as far as we can find documentation that will tell us what that property ever was. Was it always vacant land? Did it suddenly become a gas station and then turn in? In fact, I had one two weeks ago that was a gas station for a long time, then turned into a like a taco shop, and then is now a Popeyes. So, you know, lots of things can be on a property and change over time. And as cities build and grow, then it's going to change all what it was before. So when you purchase a building or property, you now become the owner of any environmental issues that property ever had. So this is a deep dive look at what was there before. Could it possibly have caused any kind of contamination to the ground or its neighbors? And so we do a lot of, you'd be surprised on how many underground storage tanks there are, how many leaking underground storage tanks. And there's documentation and um uh entities that track all of that. So we can tell, like if a gas station was there previously and the gas station shut down, and now it happens to be um, let's see, a suite of commercial property, like maybe four different offices, and they built this like a strip mall on it. We can tell like there's underground storage tanks, but they were capped off correctly, they were shut down and closed, and so those are all monitored by a TDCEQ. Um, so there's there's just a lot of history on a piece of property that you never know would exist unless you're in this industry. So we do a deep dive on that so we can tell if there's any issues.

Water Flow And Nearby Contamination

SPEAKER_02 2:59

Um, we look at gradients, you know, where does the water come from? How does the water flow? Is there um sewage? Is there uh any kind of environmental issues? Maybe there's a gas station three blocks down, but the water runs down the street past the building that you're gonna purchase. Is there any possibility that that gas station could contaminate the property that you're purchasing? All of that historical data comes into play. As far back as it's really kind of interesting, you get to see like old phone book. Um, you know, if it's a residential area, you can see all the people that have lived in that home. Um sometimes it's still vacant land, like it's never been built on it ever. I love those ones because they're super easy because there's never been anything there. Um, the tough ones, like I've had a um dry cleaners. So dry cleaners back in the day had a lot of chemicals that they used that would get into the ground, and so that caused issues. So if it was formerly a dry cleaner or a gas station, those two present more issues because there's more tracking on what was going on on that property. And it only started tracking like in the 70s. So we don't have all the historical data of what kind of contamination it could have caused prior to them starting to track was there underground storage tanks, was there anything that leaked? Um, so we, you know, we can only identify what we have data for. And then if we see any issues or feel like there's um any like things that we look for are um strain to vegetation, maybe maybe it's really lush and green, except for in this one spot. So, you know, what's causing that one spot not to be luscious like the rest? Um, is there oil standing? Maybe it was a mechanic shop before, and they had oil drum sitting outside, and it really kind of eroded some of the ground and leaked into the ground. Um, we've had one before where they were storage, they were storing tanks outside in a covered, um, kind of like a like a covered patio almost, but not didn't have slides on it. So when it rained, it still leaked or still got water inside the barrel. So then they would overflow, and you could see the drainage going down the um parking lot and off the edge, and it was draining into a stream.

When A Phase Two Gets Triggered

SPEAKER_02 5:21

So now that kicks into a whole nother environmental issue, and then you start recommending what's called a phase two. Uh, we don't do those, but other companies do. They have to have professional geologists on staff, and we don't have those, but um we refer those out to another partner, and that's like they do core sampling of the ground. They want to see how far down is that going? Is it affecting the water? Where does that water go to? Is that drinking water? Is that stream water? Is it killing the animals or the fish that might be in the water? So there's a lot of investigation on a phase one, and then a phase two gets even deeper on just more scientific, if you will. Phase one is really topical, um, historical, what you can visually see, and then a phase two goes deeper where they start going underground or they'll start digging, um, taking samples of things.

Asbestos And Lead Testing Clues

SPEAKER_02 6:14

So a phase one can also re um sometimes we require or will recommend uh asbestos testing or lead testing based off of the age of the building, maybe some of the materials that we're seeing. If we're seeing, you know, you can't tell whether asbestos is there or not until you put it underneath the microscope. But after being in an industry for so long and seeing materials over and over again, we can say, oh, hey, you know, this one normally comes back positive. Not always, but I would definitely have that checked first to make sure that it is or isn't, so that you know how to move forward once you purchase the building. Because you're buying that, right? You're you're buying whatever is already there and now you're responsible for it. So

Bank Requirements And Buyer Protection

SPEAKER_02 6:53

the banks always require phase ones before you're doing commercial buildings. Um, they want to know what they're funding money for, right? Are we gonna give you all this money to buy this building? And then you're gonna have to go put it in another 20, 30, 50 grand to fix something that you weren't aware was there because you didn't do a phase one. So it's a great protection of liability, it's a great educational piece to know what you're buying. And then it can also be a great negotiation tool depending upon what's found. You know, asbestos isn't the worst thing to find if you're not gonna go in and gut it and remodel it and change it all. If you're gonna gut it and remodel it, definitely get an asbestos test because that gets expensive. If you find it, you have to have that abated by a professional abatement contractor, asbestos abatement contractor. And and that adds more to the expense of the building after you purchase it. So it's better to know ahead of time. I've had I've had um buyers back out of deals because it had asbestos, and then I've had some buyers that, yeah, that's not a big deal. We're gonna, we know we're gonna add that into our budget of what that's gonna cost us to purchase this building. So it can go either way, but definitely knowing that it's there before you purchase is better than finding out after fact because usually you have a budget to buy, and now you found out you gotta spend so much more to fix it. Um, definitely a great process to figure out what's there before you actually purchase it.

SPEAKER_01 8:15

And what

Why Phase I Reports Expire

SPEAKER_01 8:16

do the current owners or the sellers have in place usually? Like they also had to conduct this phase one um, you know, assessment as well. And then is it easier for you guys if it's something that has been, you know, is being recently flipped? So can you reference that other assessment?

SPEAKER_02 8:37

No, that's a really good question. Uh, they're only good for 180 days. So it's 60.

SPEAKER_01 8:41

Oh wow. Okay. Okay, wow. Okay, that's a big difference.

SPEAKER_02 8:45

Yeah, it's great that you had one done, but now that you're selling a year or two later, you've got to the next guy's gonna have to get a new one. You can refer back to that one and say, hey, they did one here. Here's what was found. Well, we went on site, we didn't see anything different, or we found XYZ because, like I said, maybe before it was a taco shop and now it's a gas station. And then the two or three years they had it, they had an oil spill. So you there's there's just too much, too many things that can change on a property once it's owned by whoever buys it now. And so it's always good to do your due diligence in between each purchaser. It's not something that you do once and it lasts forever. You have to renew that all the time because whoever's owning that building now could be doing something completely different than you did, or it could be a commercial building with just offices in it, and then that you know, you sell the building to the next office guy and he's leaving all the offices alone, but you still do that due diligence to make sure that it was 90% offices and then one mechanic shop, right? So you've always gonna know what was there prior to buying it, so that you're not taking on the liability of anything that happened to that property prior to your ownership.

The Dry Cleaner Plus Gas Station Surprise

SPEAKER_01 9:55

And you brought up an interesting point, I mean, among the many, but uh that even if it's older, it doesn't necessarily mean that the property can have more risk, it just matters what it was used for. What have you seen recently that's been um eye-opening or caught your attention? Like, this is kind of wild. Like, we didn't expect this to all this to happen on this one location.

SPEAKER_02 10:19

I I should have known by the style of the building that it used to be a dry cleaner, because there's a particular brand dry cleaner out there that all their buildings are shaped the same, but I didn't catch it at first because now it's a uh it's a retail shop, and I was like, oh, and I, you know, usually I tend to stay away from those and I let those go to the guys that do the phase two because it usually converts to that. Um, but I saw it and I I'm like, yeah, we can come do that. And I started investigating. I'm like, oh, I knew that building looked familiar, just the shape of it. And I was like, oh yeah, I should have keyed into that. That I I knew that was gonna come out being a dry clear with a gas station next door. That was now the Popeyes. So now you've got two whammies next to each other, right? And so not harder, just more detailed and more digging and making sure that everything has been closed off correctly and there's no outstanding lanes or no outstanding um wrecks or what they call it, uh, environmental concerns. So that that was a hard that was I can't say it was a hard one. It was just like that was a little bit deeper dive on, took a little bit longer time because those two were together. Usually it's bad if you get one of them, but when they're both next to the door at each other and it's close to an airport. So that property was really interesting to dive into and just this took some more digging, which I always find interesting to see what it was in the past and how like when did the records really start? When did that town really begin? And this is downtown Dallas, so you know it was cool to see back in the 40s that Dallas is only maybe this big, and then in the 50s and the 60s, and you could see how the how the grid work grew. And the interesting thing too is like way back in the day, everything's hand-drawn. Like all the schematics of the cities is all hand-drawing, right? They didn't have CAD or programs to do all that back then. Everything's on paper, and you know, can you read Fred's writing or not? So it's kind of cool to go back that far and really see the detail that they put in hand-drawn drawings. So that it's it's a fun, it's interesting. I like doing them, but they take a long time to do just because there's so much information to dink through.

SPEAKER_01 12:26

Do

Where The Records And Data Come From

SPEAKER_01 12:27

you go to like government records? Do you go to the library? How do you find all this?

SPEAKER_02 12:32

A lot of it now is there's a couple of um companies that do that for you. So they have all the data and that makes it a heck of a lot easier. But there's still stuff you gotta pull online from Dallas, from whatever cities, CAD programs, you know, you gotta find um delineations of property. Google Earth helps a lot because you can see what's around it without physically walking a you know, four-mile block. Um we usually do everything around it within a two-block radius and then use a computer for the rest of it. But it's really it's really interesting to see how things have grown over time. That's that's what I like the most about them, just to see what it's been before and how it changed. Just to see the growth of bacteria.

SPEAKER_01 13:17

Yeah. And

When A Phase One Is Enough

SPEAKER_01 13:18

I we only have like 30 seconds left, but is it all always a case that you have to go beyond a phase one? Does any investigation stop at phase one?

SPEAKER_02 13:27

Yeah, there are a lot of them stop at a phase one, just really depends on what was on the property prior.

unknown 13:33

Yeah.

SPEAKER_02 13:33

Okay, awesome. It's not always an automatic phase two. That really has to have some issues on the property beforehand.

SPEAKER_01 13:40

Okay, so some hope for some um buyers that they might not have to go through all that. Well, Shelly, thanks again for walking us through this. You explained it very clearly, and we appreciate that.

SPEAKER_02 13:51

No problem.

SPEAKER_00 13:56

Thanks for listening to the Environmental Testing Show. If you're concerned about mold, asbestos, or other environmental hazards, peace of mind starts with proper testing. Call 972-876-0008 or visit dcgenvironmental.com to schedule a convenient appointment. Because when it comes to your environment, yes, it's a safety plan.