Most commercial real estate lenders today will require that a Level I toxic report be obtained prior to making a new commercial real estate loan. The reason why is because a lender that forecloses on a toxically-impaired property is strictly liable for the clean-up costs.
A Level I toxic report is a written report about the investigation of a property by an environmental engineering firm. The environmental engineering firm will inspect the property for evidence of environmental contamination, including such signs as withered vegetation, protruding connection pipes to underground storage tanks (UST's), and prior or existing uses that might have produced dangerous contaminants.
The environmental engineering firm will also check the chain of title for recorded leases and deeds for possible prior uses that were environmentally dangerous, such as Bob's Wood Refinishing or Johnson Dry Cleaners. The environmental engineering firm will obtain a completed contamination questionnaire from the owner of the property.
The typical Level I toxic report costs between $1,800 and $3,000. If the Level I report comes back unfavorably, this will show up as a statement saying that, "Further investigation is required." It is not enough to get a Level I report. You have to actually read it and make sure it doesn't say that more investigation is required!
If the environmental engineering firm fears that the property is contaminated, the next step is a Level II toxic report. A Level II toxic report involves boring test holes to obtain soils sample twenty or so feet down. The soils samples are then sent to a lab for testing for environmental pollutants. A Level II report usually costs between $9,000 and $20,000. They often show that the property is not polluted, and the loan is still made.
Why is a lender or a new property buyer responsible for the cost to clean up environmental contamination that he did not create? Both the Federal government and the state have laws on the books that provide for strict liability for environmental clean-up costs. In other words, it does not matter who created the pollution. Even if the pollution was created before the property owner was born, the property owner still has to clean it up!
Before you buy any commercial property today, it is imperative that you first obtain a Level I toxic report. If the report says that there is no evidence of contamination, and then contamination is later discovered, the government cannot usually hold you responsible for the clean-up costs. The clean report provides you with a safe harbor.
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