Phase I recommends a Phase II. Seller wants an as-is close in 30 days.

Under contract on a 21,000 square foot neighborhood strip center, seven bays, 78 percent leased. Contract 1.44m, in-place NOI about 139k, so a 9.65 in-place. My buyer is at 1.61m contingent on clean environmental, which is a 8.6 on in-place and he's fine with that because two of the leases are 30 percent under market and roll in 19 months.

One of the bays was a dry cleaner until roughly 2011. Phase I came back with a recognized environmental condition and a recommendation for a phase II, which is 14 to 22k and four to six weeks depending on the lab. My due diligence expires in 12 days and the seller has already said in writing he will not extend and will not contribute to environmental work, as-is, 30 days, take it or don't.

My buyer will not close without the phase II. His lender will not fund without it either, which he told me flatly. So the four options I see:

Pay for the phase II myself out of pocket and eat the timeline risk, which I can't do inside 12 days anyway.
Terminate and lose the 4k I've spent on the phase I and survey.
Find a buyer who takes environmental risk as-is, which means a much wider cap and my 170k spread compresses to nothing.
Assign the contract now at a reduced fee to my buyer and let him negotiate the extension directly with the seller.

Option 4 is the one I keep coming back to and I don't trust it, because if the seller won't extend for me he won't extend for him, and then I've assigned for a small fee into a deal that dies and I've burned a buyer relationship.

What I don't know is whether a dry cleaner REC from 14 years ago is the kind of thing that kills a strip center or the kind of thing that gets priced.

Answer

0Rena Expert

Two mechanics matter here and both cut against options 1 and 4.

First, environmental liability on contaminated property can attach to owners regardless of who caused the contamination, and the protections that exist for buyers generally depend on having completed appropriate inquiry before acquiring, which is what the phase I and any recommended follow-up work goes to. A phase I that recommends a phase II and a buyer who closes anyway is exactly the fact pattern that puts those protections in question. How that plays out is specific to the site, the state program, and the federal framework, so it's a question for environmental counsel and a qualified consultant, not a forum. The practical consequence is the one you already found: institutional lenders will not fund into an unresolved REC, which shrinks your buyer pool to cash buyers who price the unknown at the top of the range.

Second, the phase I report itself is usually licensed to the party who commissioned it and often can't be relied on by anyone else without the consultant issuing a reliance letter. If you're planning to hand your report to a buyer or to a future buyer six weeks from now, ask the consultant now what reliance costs and whether the report has a shelf life for lender purposes, because these reports are commonly treated as stale after a period and lenders set their own limits. Confirm that in writing with the consultant.

On the decision itself, the thing carrying your whole spread is 19 months of below-market rollover, and that value survives whether you close now or not. The environmental unknown does not survive contact with a lender.

3 replies

1joe_delgado5AP4CPRO6

Dry cleaner RECs get priced, they don't automatically kill deals, but the pricing is wide and slow and neither of those helps you in 12 days. Perc and its breakdown products migrate and the remediation range on a small site runs from a monitoring plan that costs almost nothing to six figures of soil and groundwater work. Until phase II you're guessing inside that range and no lender is going to guess with you.

Option 4 is worse than you think. If the seller won't extend, your buyer inherits a hard 12 day clock on a deal he can't fund, and he'll know within a day who handed him that. I'd terminate, keep the phase I, and go back to the seller in six weeks when nobody else has closed either. He'll have found out what the market thinks of an as-is dry cleaner site by then.

1gregpowell66AG4BPRO8

One more angle before you terminate. Ask the consultant whether a limited phase II scoped just to the former cleaner bay, a few soil borings and one groundwater sample, can be done faster than the full recommendation. I've had site work turned around in under three weeks with a rush lab fee. That doesn't solve the seller's refusal to extend, but if the answer is 17 days rather than six weeks, the conversation with the seller changes from "give me six weeks" to "give me 17 days and I'll pay for it," and sellers say yes to the second one more often.

Still wouldn't do option 4.