Buying Commercial Property

Buying commercial real estate can be complicated and a key component in protecting your investment is understanding the environmental liabilities. Performing an environmental due diligence, Phase I ESA, will protect your investment under the Federal Comprehensive Environmental Response and Liability Act (CERCLA).

Buying Commercial Property

The following is a list of requirements that are common to most Banks when it comes to financing Income Producing Properties (Shopping Strips, Apartment Buildings, and Commercial Warehouses):

  1. Banks will usually not finance more than 75% of the appraised value of the property.
  2. Properties must show sufficient debt-repayment ability by way of a ratio of 1:20X or higher.
  3. In case that the property financed is occupied by a sole tenant (commercial warehouse) the lender might want to take a look at the financial strength of the tenant.
  4. You will need to provide an updated rent roll to the lender, which might be required every year.
  5. If the property is not residential in nature, the lender might require an environmental audit (phase I) to find out any possible contamination of the site. This is where MS5L can help you.


A complete Due Diligence routine includes Phase 1 Environmental Site Assessment. Industrial property lenders and investors routinely require environmental assessment either as part of your application package or at minimum prior to loan closing. In many cases the potential for loss as a result of environmental contamination eclipses potential costs resulting from building defects or systems failure. Contamination on the property or under the property in soil or groundwater or a vapor intrusion condition can have potentially devastating effects including:

  1. Reduction of property value
  2. Impaired ability to repay mortgage loan
  3. Liability for damage to health of occupants
  4. Rent losses based on unsafe working environment
  5. Difficulty or inability to rent or sell the property
  6. Liability for cleanup under federal and state CERCLA programs

A Phase 1 Audit is a rigorous investigation designed to determine that the property you own, buy, lease, occupy, insure or hold a mortgage on is free from health risks and financial liability associated with environmental defects.