Moses Kagan on Real Estate

What you do before buying land for development (part 1)

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Little known fact: Under federal law, if you buy a parcel of land that’s polluted, you become responsible for cleaning up the pollution, even if you weren’t the one who polluted it.

I once was in escrow to buy a huge, sweet parcel on Sunset to develop into apartments. It turned out to be the site of an old gas station. The gas tanks had leaked, allowing loads of Benzene (a very serious carcinogen) to escape into the soil. Not only would that parcel have been a terrible choice to develop; had I bought it, I might have become responsible for a half million dollar clean-up, even if I didn’t ultimately want to develop it.

How did I find out about the Benzene? I did what’s called a “Phase I” environmental review. A Phase I is essentially a review of the relevant documentation by an environmental consulting company. They check all the relevant records going all the way back to when the parcel was first sub-divided, then write you a report outlining the environmental risks, if any. As you might imagine, this ┬áis pretty expensive.

If Phase I turns up something bad, you move on to Phase II, which includes physical testing to determine the extent of the pollution and how it might best be remediated. This much, much more expensive than Phase I!

Depending on the size of the parcel and the extent of the pollution, the Phase I and Phase II environmental testing outlined above can run you anywhere from $5,000 up to a lot more. But obviously it’s a lot cheaper than finding yourself the proud owner of some kind of cancer mill.

Pro tip: If you’re a small-time developer trying to limit your pre-development costs, focus on multifamily zoned land (like R3, R4, RD 1.5, etc.). You can build apartments or condos on C and M land, but those parcels are much more likely to have environmental issues than land which has always been used for residential.


Written by mjkagan

07/24/2012 at 7:23 am

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