Why does my bank want me to get a Phase I or Phase II ESA?

Learn why banks require a Phase I ESA.

When it comes to purchasing or refinancing a piece of property, a lot of people end up having questions around the Phase I and Phase II ESA process. One of the most common things we hear is people wondering why their bank is requiring a Phase I, or in some cases, a Phase II ESA at a piece of property. So whether this wasn't properly explained to you by a bank or lending institution, or you aren't entirely sure what a Phase I ESA actually is, if you're wondering why a bank might require a Phase I or Phase II ESA, we'll try to answer that question as easily and transparently as possible. Just bear in mind we aren't a bank, but this article mirrors conversations we've had with folks in the financial realm when it comes to Phase I work.

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

The short and sweet answer is because you're borrowing their money, and they get to call the shots. Don't like their rules? Don't like their requirements? Don't take their money. I know, I know, that's a pretty sour way of looking at it, but that's the reality of the situation.

But let's think about it for a minute. When you want finance (or refinance) a piece of property, you're going to need money to do so. In order to get that money, you turn towards some type of lending institution, such as a bank, and ask for a loan. That loan comes with stipulations, and some of those stipulations are in place to protect the bank, or lender, just in case. A Phase I ESA is something that protects a bank, just in case the property is found to be contaminated. Why? Because contaminated properties need to be cleaned up, and cleaning up contamination can be costly!

So a bank is asking you to get a Phase I because they want to make sure you aren't buying a contaminated property. If you are, and the Phase I ESA you get comes back saying there might be contamination at the property and some one should look into it further, then the bank might ask for further information regarding the contamination, which would occur in the form of a Phase II ESA.

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

Another common question, and the reason again is pretty simple. In a worst case scenario, you walk away from the property. Whether due to financial hardships, or because you find out it's contaminated and you elect to stop paying back the loan, in a scenario like this the bank could foreclose and become the owner of the property. In this example, the bank doesn't want to become the owner of contaminated property.

Plain and simple, banks don't want the liability of ever owning a piece of property which could be contaminated, and cost them money to either sell the property at a loss, or pay for a clean up.

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

While we can't know for certain, we can say from experience, we've never talked to someone who was obtaining financing through a lending institution, such as a bank, without having to get a Phase I initially, and a Phase II if the Phase I recommended further work. So will a bank always require you to get a Phase I ESA? Chances are pretty good yes, they will, but we aren't certain. When in doubt, talk to your lender. Again, put yourself in the bank's shoes. They're lending you money, and in a worst case scenario, they might end up owning that property in case you can't pay for it. They don't want to finance, or potentially own a property there is contaminated.

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

We hear this all the time. Talk to your lender as early in the process as possible about Phase I work. We talk to people all the time who have "a week or two to get a Phase I done" at a piece of property, and are shocked that it's either going to be more expensive than they thought, or might not provide them the liability protection they need because it's done at such a last minute, and might not cover everything it needs to. Be aware that if you're purchasing something and are trying to secure financing through a bank, a Phase I ESA is very, very likely.

If you're wondering about the ins and outs of getting a Phase I, we'd love to talk. We work with clients all over the United States on Phase I projects, whether they're new to the subject, or seasoned veterans, and we'd love to learn if we're the right company to help you and your business when it comes to Phase I work. Additionally, we've worked with many banks and lending institutions, if you're wondering is RMA a bank approved Phase I ESA provider. Feel free to give us a call anytime at 888-RMA-0230 or click here to contact us online.