We all practice due diligence in various aspect of our lives, taking the reasonable steps to protect ourselves when making a decision. Whether in selecting the foods we eat, the vacations we plan or the vehicles we buy, we are constantly weighing out pros and cons of those decisions. Keeping this in mind, we can see just how important due diligence is in commercial property acquisition.
Acquiring real estate is the biggest financial decision many of us will make in our lives, we should be aware of all of the implications of that decision. For all of the properties that have seen an exponential increase in value over the last decade, there are just as many horror stories of people buying the wrong asset, leaving them heavily indebted to the property. This is usually the result of a hasty acquisition made while emotions are high and real property conditions are unknown.
There are various forms of property due diligence. These may include, but are not limited to, a property appraisal, legal, hazardous material surveys, archeological assessments and environmental assessments. All of these items are general requirements of most financial institutions in Ontario depending on the property and its location. You simply will not receive financing unless you complete one or more of these studies.
People are sometimes skeptical of the added value of due diligence studies, particularly environmental assessments. Oakhill receives frequent calls from buyers and sellers that assumed that there was no reason to do an environmental assessment and then were informed at the eleventh hour that they will not get a mortgage unless an environmental assessment or hazardous material survey is completed. This ends up costing more as the work has to be expedited in short order. The best course of action is to be proactive with due diligence responsibilities, there are benefits to completing environmental due diligence whether the bank requires it or not.
Not addressing the liability only gets more costly with time. Regulations continue to become more and more stringent and time only allows contamination to spread further.
Nobody wants to inherit or hold onto a liability that is worth exponentially more than the value of the property.
Believe me; it happens more often than you might think.
An Environmental Site Assessment or ESA is a property investigation that assesses potential environmental liabilities and qualifies them to the client (buyer or seller). This gives the client the best information possible in making an educated decision relating to the environmental conditions of a property (and the potential associated costs). An ESA is a three stage process:
1. A Phase 1 ESA looks to first determine areas of potential environmental concern – these could be from the property itself or neighbouring properties;
2. A Phase 2 ESA qualifies those concerns through intrusive investigation – including but not limited to drilling and sampling boreholes and/or monitoring wells; and
3. A Phase 3 ESA is a remedial phase conducted to remove contamination (the liability) if it was discovered (during the Phase 2 ESA).
Site contamination isn’t necessarily a deal breaker but it is imperative to fully understand the conditions of a property before jumping into it. Once you buy the property, you own all of its liabilities and you may even be liable for contamination to other properties.
Property value and price negotiation is an additional added benefit of completing your environmental due diligence. The findings can act as a bargaining chip for a deal. For example, if there is an expected $100,000 environmental liability on the property, a buyer and/or seller may be willing to negotiate the price in order to get the deal done. Keeping this in mind, it is essential that the parties have all of the information needed to make sound decisions, whether selling or buying.
Want to do your due diligence? Need an ESA? We can help. Oakhill’s environmental team collectively has over 100 years of experience with environmental issues in the areas of soil sampling & analysis, ground water monitoring, air, noise, asbestos, mould and more.
Oakhill prides itself on helping clients practice their environmental due diligence and are proud of the numerous deals and transactions that we have been involved with throughout Ontario. Give us a call at 905-988-1243 or send an email to [email protected] to learn more about evaluating a property’s environmental liability in real estate acquisitions.
