Self-storage is one of the cleanest uses in commercial real estate, which is exactly why buyers treat the environmental report as a box to check for the lender. But storage tends to get built where nothing else would, next to things nobody else wanted, and the liability that comes with contaminated ground does not care what is sitting on top of it today.

Key takeaways

• Self-storage is a low-risk use, but the Phase I assesses the land, and storage is often built on former gas station, auto repair, dry cleaner and industrial parcels, or in converted buildings that carry their prior use with them.
• Under CERCLA the current owner is liable for contamination regardless of who caused it. The only defence is a Phase I completed to the ASTM E1527-21 standard within 180 days of closing, which makes the report the buyer’s protection, not the lender’s paperwork.
• Petroleum is excluded from CERCLA, so old fuel releases are handled through state tank programs such as the TCEQ’s in Texas and may never appear in a federal database.
• Risk comes from three directions: what the site was before, what is next door, and what tenants have left inside the units. A Phase II costs thousands against a purchase price in the millions and is the only way to turn a suspicion into a number.

Ask a self-storage buyer what a Phase I environmental site assessment is for and the honest answer is usually that the lender wants one. The report gets ordered in the first week of the inspection period, comes back in the third with a finding of no recognized environmental conditions, and goes into the closing binder next to the survey. Most of the time that is how it ends. Storage facilities do not manufacture anything, do not process anything and, in theory, do not store anything that leaks. Of all the property types a lender finances, it is among the least likely to come back with a problem.

The trouble is that the property type is not what the Phase I is assessing. The land is. And the land under a storage facility very often has a past that has nothing to do with storage.

Storage goes where other uses would not

Self-storage is a use that tolerates what other commercial uses reject. It does not need visibility from a signalized intersection, foot traffic, or a pleasant view. It does not need to be next to a grocery anchor. It works on oddly shaped parcels, on land backing onto rail lines and highways, on the back half of industrial subdivisions and in the boxes that retail abandoned. A storage developer looks at a piece of ground that a restaurant, an office or an apartment builder walked away from and sees an opportunity, because the rent per square foot storage needs is low enough to make cheap land work.

The parcels that come cheap tend to come cheap for a reason. Along the arterial roads where first-generation storage was built in the 1980s and 1990s, the neighbouring uses were gas stations, auto repair shops, truck terminals, dry cleaners, body shops and light manufacturing. In many cases the storage site was one of those things before it was storage. Conversion projects, which have become a large share of new supply as developers turn empty big-box retail, warehouses and manufacturing buildings into climate-controlled storage, carry the prior use with them by definition. A former printing plant that is now 800 units of climate control is still a former printing plant at the soil level.

None of this makes a facility a bad investment. It means that the boring report the lender asked for is looking at a piece of land whose history is more interesting than the building on it, and that the buyer should be at least as curious about the answer as the lender is.

Why the liability belongs to whoever owns the dirt

The reason environmental due diligence exists as a discipline is a federal statute most storage buyers have never read. Under CERCLA, the law that created the Superfund program, the current owner of a contaminated property is liable for cleaning it up. That liability is strict, meaning it does not matter whether the owner caused the contamination or knew about it, and it is joint and several, meaning that if the previous owners are gone or broke, the current owner can be held for all of it. Most states have laws that work the same way.

A buyer who purchases a facility on ground that turns out to be contaminated therefore owns the problem the day after closing, regardless of the fact that the contamination came from a gas station that closed in 1987. The only way out is a set of statutory defences that Congress built into the law for buyers who did their homework. To use them, the buyer has to show that it made what the statute calls all appropriate inquiries into the property’s condition before buying, and the recognized way to do that is a Phase I assessment performed to the current ASTM standard, E1527-21, by a qualified environmental professional. The report has to be reasonably fresh, which in practice means completed within 180 days of closing or updated if older, and the buyer has to have done its own part, including checking title for environmental liens and use restrictions.

This is the point that gets lost when the Phase I is treated as a lender requirement. The lender wants the report to protect its collateral. The buyer needs the report to protect itself, and the protection only exists if the report was done properly and on time. A buyer who closes on a stale Phase I, or on one the seller provided, or on a cheaper transaction screen that does not meet the standard, has bought the property without the defence. If a problem surfaces later, the question of who pays for it has already been answered.

There is one wrinkle that matters especially for storage. CERCLA excludes petroleum. Gasoline and diesel contamination, which is far and away the most common kind found under commercial property along an old highway strip, is regulated separately, mostly by the states through their underground storage tank programs. In Texas that is the TCEQ’s petroleum storage tank program. The practical effect is that a former gas station site can carry a cleanup obligation that never shows up in a federal database, and that the rules for closing out an old tank release are set in Austin rather than Washington. A buyer with a facility on a former service station corner, of which there are a great many, needs a consultant who knows the state file as well as the federal one.

The three places the problem usually is

Environmental risk at a storage facility tends to come from one of three directions, and only one of them is on the property.

The first is what the site was before. The Phase I consultant’s core job is to reconstruct the history of the parcel back to its first developed use, usually through old aerial photographs, fire insurance maps, city directories and permit records. For a storage site the findings that matter are the ones that involve liquids: fuel, solvents, oils and cleaning chemicals. A former gas station means underground tanks, which may or may not have been removed, and may or may not have been removed properly. A former dry cleaner means chlorinated solvents, which sink through soil, travel in groundwater and can produce vapours inside buildings decades later. Auto repair, body shops, print shops, machine shops and truck maintenance yards all leave the same family of contaminants behind. When the consultant finds one of these in the history and cannot find a record that it was investigated and closed out, that is what the report calls a recognized environmental condition, and it is the finding that should get the buyer’s attention.

The second direction is next door. Contamination does not respect lot lines. Groundwater carries solvents and fuel from an upgradient neighbour under a storage facility that never had a tank of its own, and once it is there the facility’s owner has an issue even if it has no liability for the source. A storage facility in an older industrial district may be the cleanest parcel on the block and still sit above someone else’s plume. The current standard requires the consultant to look at the history of adjoining properties, not only the subject site, and buyers should read that part of the report rather than skipping to the conclusion.

The third direction is inside the units, and it is the one the Phase I is least equipped to find. Storage tenants store things they are not supposed to. Every rental agreement prohibits hazardous materials, and every long-running facility has had a tenant who kept paint thinner, pool chemicals, fertilizer, drums of something unlabelled, a leaking outboard motor or, in the worst cases, the makings of a drug lab. Vehicle, boat and RV storage adds oil, fuel and battery acid on gravel or bare ground. A consultant walking the site for a few hours will note the obvious, but cannot open locked units and is not looking for what a tenant abandoned in unit 214. The buyer inherits it anyway. This is less a Phase I problem than a management and insurance problem, and it is a reason the environmental review should include a conversation with whoever has been running the property about what has been found in units, what has been cleaned up and what the facility’s own operations involve, from an on-site fuel tank for the golf cart to a propane exchange cage at the office.

When it is worth spending more

A Phase I costs a few thousand dollars and takes two to three weeks. When it comes back with a recognized environmental condition, the consultant will usually recommend a Phase II, which means actually sampling the soil, groundwater or soil gas at the location of concern. That typically runs from several thousand dollars for a small, targeted investigation to well into five figures where the concern is a large or poorly documented one, and it adds several weeks to the timeline.

Buyers resist the Phase II for predictable reasons. It costs money the buyer may not recover if the deal falls apart, it eats into an inspection period that is usually thirty to forty-five days, and sellers dislike it because a bad result is a disclosure obligation that follows the property whether or not this buyer closes. All of that is true. It is also true that the decision is being made about a purchase price measured in millions against a test measured in thousands, and that the finding a Phase II produces is the only thing that turns a suspicion in a report into a number that can be negotiated. A buyer who knows a former tank release was closed out under a state program with a no-further-action letter can price the property with confidence. A buyer who knows there is a solvent plume with no defined extent can walk, or can go back to the seller with a very different conversation. A buyer who does not want to know is the one who ends up owning whatever it is.

The practical answer for most storage deals is to build the time in. Order the Phase I the day the contract is signed rather than a week later, ask the consultant for an early call on whether anything in the history looks like it will need a second look, and negotiate an inspection period, or an extension right, that can absorb a Phase II if one is needed. The cost of that flexibility is nothing. The cost of not having it is a decision to close without an answer.

The takeaway

Self-storage earned its reputation as a low-risk property type honestly, and the vast majority of Phase I reports on storage facilities come back clean. But the reputation belongs to the use, and the liability belongs to the land. Storage sits, more often than most property types, on ground that used to be something else and beside things that still are. The Phase I is the buyer’s one chance to find out what that history is before becoming responsible for it, and the legal protection it provides exists only if the report is current, properly scoped and actually read. Treated as the lender’s document, it is a formality. Treated as the buyer’s, it is the cheapest insurance in the deal.