What is a Phase 1? Do I Need One?

Written by: Commercial Real Estate Inspectors, LLC

I have been asked a lot recently about Phase 1s. I realize there is a lot of confusion about them. Let me try to clear the air a bit so to speak.

What is a Phase 1?

In its simplest terms, a Phase 1 is a site visit and document review of the surrounding area to determine if further investigation is advised from an environmental standpoint.

Phase 1 Inspection 

A Phase 1 inspection is a review of local government documents regarding the site to determine what the past usage of the site was along with extensive document review of the surrounding area. It also entails a very involved and detailed site visit by a qualified professional. In addition, there is database information that is gathered and reviewed of the surrounding vicinity to determine if there is a potential risk from an environmental standpoint in the immediate area.

These potential risks can be anything from a past gas station on or near the site that might have contaminated the groundwater to there having been a dry cleaner on the site that might have spilled chemicals into the ground. There could have been past dumping on the site or an auto repair that did not handle the oils properly, lead in the paint, asbestos, and on and on.

I think you get the picture. The focus of a Phase 1 inspection is environmental not the structure or any of the systems of the building. The systems are the focus of the general visual inspection. They are two separate areas of responsibility. Both are important. Many lending institutions require a Phase 1 clearance before they will lend money.

A Phase 1 inspection is an integral part of many commercial and industrial real estate transactions. One bank that I know of will not lend for any commercial or industrial transaction on real estate over 1.5 million dollars without a Phase I. We are hard pressed to buy anything in the Los Angeles area in the commercial or industrial real estate area for under that.

Phases 2 & 3 

There are two other aspects to a Phase 1 that may come into play depending on what is found during the Phase 1 inspection and research. These are Phase 2 and Phase 3. As you might assume Phase 2 and Phase 3 are the more involved aspects of the environmental field. Phase 2 involves testing of the site such as coring into the earth and taking samples of the soil along with testing it to determine what is in the soil. The information during a Phase 2 will determine if the site warrants further investigation and/or to be remediated. If remediation is needed this is Phase 3.

Environmental Phases Industry Standards

Each environmental Phase whether it is Phase 1, 2 or 3, has a very involved set of industry standard requirements. Each requires highly trained professionals to do properly. This is not an area to skimp on. Have a reliable company with vast experience do your Phase 1 inspection. Getting the cheapest deal for something this important I feel could easily be fiscally irresponsible. A properly done Phase 1 inspection really is for everyone’s protection, not just the buyer.

The current rate for a professionally done standard Phase 1 inspection is approx. $1800.00 – $2000.00. Just so you understand to obtain the above-mentioned documents is hundreds of dollars by itself. The report ends up usually being hundreds of pages. This price does not usually change unless the site gets very large and very involved. Currently, the price stated will usually handle over 90% of all commercial real estate transactions.

I hope this clears the air a bit on what a Phase 1 inspection is.

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