By: Rob Noble, First American Natural Hazard Disclosures, JCP-LGS Disclosures
When purchasing a commercial property, investors take several factors into account to make that final purchase decision. Generally, they gather as much information as they can in order to give them the best overall picture of the condition of the property, which helps make the best decision possible on that purchase. They obtain this information through a variety of resources, such as industry trend reports and reviewing the content of a Phase I report. While a Phase I report gives buyers and sellers a snapshot of the condition of the property, it doesn’t necessarily comply with all state regulations.
Along with the duty of a seller to disclose anything that might impact a buyer’s decision to purchase, California law requires that a seller of commercial property must disclose if the property is in one or more of six statutory natural hazard zones mapped by the state: Area of potential flooding, Earthquake Fault Zone, Seismic Hazard Zone, Special Flood Hazard Zone, State Responsibility Area, and Very High Fire Hazard Severity Zone.
First American Natural Hazard Disclosures and JCP-LGS Disclosures offer three products specifically for the commercial market. These disclosure reports were designed not only to assist commercial buyers and sellers with state regulatory compliance, but also to provide them with valuable information that can help make solid purchase decisions in a cost effective way. But beyond providing the buyer with a basis for decision making, this type of information can also provide an element of protection for the seller as well as it goes directly to the requirement of the disclosure of material facts.
Many investors opt to start with a costly Phase I report. The statutory hazard zones in California are not disclosed in a Phase I report and must be disclosed separately. Therefore, regardless of whether a Phase I is ordered, it is the seller’s duty to disclose to a potential buyer any material facts, including whether or not a property falls into one of the natural hazard disclosure zones.
Some sellers opt not to obtain a Natural Hazard Disclosure Report and, instead, make the natural hazard disclosures on their own. In doing so, they are assuming all of the liability and the risk of any potential error in zone determination. By obtaining an NHD Report from a third party provider, that liability is shifted, thus, conferring a layer of protection from possible errors in the report. The NHD report is just the basic report covering the natural hazard zones.
Other disclosure reports available include the Commercial EnviroCheck Report and the Commercial Tax Report. Although not required, these two reports provide valuable insight into a property and provide the buyer with additional information and a good basis for making a decision.
The Commercial Tax Report breaks down the current tax obligations on the property and includes detailed information on important Mello Roos and 1915 Bond Act assessments.
This information is not included in a Phase I report and gives the buyer a snapshot into the potential obligations associated with the property.
The Commercial EnviroCheck Report provides a “first look” screening of government environmental hazard databases that report known or potential contamination sites on or near the property. While this government records search is a part of a Phase I report, it’s just a small part.
Bottom line, while the main purpose of a Phase I report is to discover, through on-site investigation, if the property is contaminated before purchasing or developing it, it’s a costly report. The much lower cost Environmental Report can help a buyer decide if, in fact, a Phase I is the next step in the due diligence process of purchasing commercial property.
In fact, the cost of all three reports together is substantially lower than a Phase I report.
The value of these reports is they can give buyers the information they need to help them decide whether or not a Phase I is the next step — not to mention providing possible protection to the seller for obtaining the information from a third party provider.
Generally ordered at the beginning of a transaction, these disclosure reports provide valuable information and protection.
*This product is only available in CA.