FAQ: Why Does My Bank Want a Phase I or Phase II ESA?

Learn about Bank Requirements for Phase I or Phase II Environmental Site Assessments

Why does my bank want a Phase I ESA?

When purchasing or refinancing a property, many people have questions about the Phase I and Phase II ESA situation. A general question people wonder about is why their bank is demanding a Phase I, or in sometimes, a Phase II ESA on a particular property.

If this wasn’t thoroughly explained to you by your bank or lending institution, or you aren’t completely certain what a Phase I ESA is, or if you wonder why a bank may require a Phase I or Phase II ESA, you’ll find some answers here.  Just remember that Lougheed Engineering a bank – so you should really have your bank give you the final answer.  We’ll discuss what the experts in the financial field usually say when it comes to Phase I work.

Why do banks require a Phase I or Phase II Environmental Site Assessment?

The brief answer is because you’re are borrowing their money, and they need to limit their risk.  If you don’t follow their requirements, they probably will not lend you the money.

Let’s consider that for a minute. If you want to finance (or refinance) property, you will need money.  To get the money, you use some type of lending institution, such as a bank, and ask for a loan.  That loan comes with conditions, and some of those conditions are in place to protect the bank.   A Phase I ESA is a tool that shields the bank in case the property is found to be contaminated. Why? Because contaminated properties need to be cleaned up, and cleaning up contamination is costly!

The bank wants you to get a Phase I so that they are certain you are not buying a contaminated property. If you are, and the Phase I ESA indicates that there might be contamination on the property, then the bank probably will ask for more information about the contamination.  This further inquire is typically in the form of a Phase II ESA.

Why does the bank care if I buy a contaminated property?

In a worst-case situation, you might walk away from the property.  Whether this is due to financial hardships or because you discover it is contaminated and you decide to stop paying the loan.  If this happens, the bank may foreclose and become the owner of the property.  Keep in mind, the bank never wants to become the owner of contaminated property.

Simply put, banks don’t want the liability of owning a piece of property that is potentially be contaminated.  Then the bank is in the position of costing them money to either sell the property at a loss or pay for remediation.

Will a bank always require a Phase I or Phase II ESA?

In our experience, we’ve never spoken to anyone who has obtained financing through a lending institution, such as a bank, without having to get a Phase I initially.  And sometimes, depending on the situation, Phase II is required (if the Phase I review recommends further investigation.)

Will a bank always require you to get a Phase I ESA?  Possibilities are high that they will.  When in doubt, we highly recommend that talk to your lender. Put yourself in the bank’s place.  They’re lending you money, and in a worst-case situation, they could owning that property if you can’t pay for it.  Banks don’t want to finance, or potentially own a property there is contaminated.

My bank told me I must have a Phase I Environmental Site Assessment at the last minute!

This happens often in our experience.   We recommend you speak to your lender as early as possible about Phase I work.  We often hear from people who have “a week or two to get a Phase I done” and are astounded that it will be expensive than they imagined.  Or the investigation might not give them the liability assurance they need because it’s done in such a rush.  Be conscious that if you’re purchasing property and are trying to secure financing through a bank, a Phase I ESA is extremely likely.

If you’re curious about the details of getting a Phase I, we’d love to help you. We work with people all the time on Phase I projects, whether they’re new to the topic, or seasoned experts.  Moreover, we work with many banks and lending institutions so we know the ropes.   Feel free to click here to contact us online.

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