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Commercial Real Estate Resource Page

Environmental Studies

What are they? Why are they performed?

1. What is a Phase I Environmental Site Assessment? Answer:

Most stakeholders involved in real estate transactions are familiar with a Phase IEnvironmental Site Assessment (ESA), a study routinely undertaken as due diligence associated with property transfer, financing or development.

Briefly, a Phase I ESA is a documentary review of a property's historical land uses and a visual inspection of the premises to identify any actual or potential sources of environmental contamination. A Phase I ESA does not include sampling or testing of soil, groundwater, or building materials. Such analyses are conducted in a Phase II ESA.

In Canada, Phase I ESAs are usually conducted in accordance with the Canadian Standards Association (CSA) Z-768-01 environmental protocol or the Canada Mortgage and Housing Corporation (CMHC) environmental site investigation procedures for mortgage loan insurance.

2. What is a Phase II Environmental Site Assessment? Answer:

A Phase II ESA is a soils and/or groundwater investigation, or a "down and dirty" way of getting "the dope" on real estate. It involves sampling and analyses of soils and groundwater. This could range from a number of drilled boreholes or test pits advanced around an underground storage tank (UST), to an extensive investigation over large tracts of the site to map contaminated soils or groundwater.

Fewer people are familiar with a Phase II ESA, which is undertaken as a follow-up intrusive study when a Phase I ESA reveals sources of contamination. Perhaps this is because, statistically, fewer than 30% of Canadian properties have historically revealed potential problems that would warrant further investigation. However, for those properties that do, investment in a Phase II ESA is well worth the cost incurred, for it could reveal gremlins in the subsurface you wouldn’t otherwise have a clue about, which could directly affect the market price of a property!

3. Which properties would warrant a Phase II ESA? Answer:

4. Why would you conduct a Phase II ESA? Answer:

As a Realtor or Vendor of a property, it behooves you to know if your site is contaminated, so that you have a chance to cleanup the contamination prior to putting the property up for sale. As a prospective Purchaser, you want assurances that the property has clear title prior to doing the deal, to preserve its market value.

As a property Developer, you could be looking at re-zoning the property for a higher use (e.g. commercial to residential), and want to ensure compliance with Ministry of the Environment's (MOE) guidelines for a specific use to facilitate a building permit application. As a Mortgage Lender, you obviously want your collateral to hold its value.

5. Who should be engaged to conduct a Phase II ESA? Answer:

Generally, any Environmental Consultant with a geosciences background can conduct a Phase II ESA. However, you would be well advised to use a licensed professional, such as an Engineer or Hydrogeologist, as your Assessor.

Such persons are obliged by legislation to maintain a duty of care and to follow established standards, such as the Canadian Standards Association (CSA) protocol Z769-00 Phase II Environmental Site Assessment (CSA, March 2000). As an added bonus, most Assessors carry professional liability insurance that can cover inadvertent errors and omissions.

6. What if contamination is identified on my property? Answer:

As an Owner, you can choose to go no further at this point. However, to meet a condition of property transfer, financing or development, further action would likely be necessary. In such cases, follow-up studies can be undertaken to confirm and delineate the nature and extent of the contamination. Practical and cost-effective response actions can then be selected for cleanup or on-site management of the contamination. The response actions constitute what is known as a Phase III ESA.

7. As a consultant, are you obligated to report to the MOE if you find contamination at my site? Answer:

Normally, findings of contamination are kept confidential under a privileged Consultant-Client relationship, and your professional is not obliged act as a "whistle blower" to any authority, except in cases of imminent danger to public health and safety, such as a noxious release into the atmosphere, or a toxin into a water supply aquifer.

8. What is a brownfield site? Answer:

According to the Ministry of the Environment, for a site to be considered a brownfield, it must meet three criteria:

1. It is an underutilized commercial or industrial site
2. It has redevelopment potential, and
3. The site's redevelopment potential is complicated by known or perceived contamination with a hazardous substance.

9. What is "contamination," as it is used to define brownfields? Answer:

A brownfield is a site contaminated with a "hazardous substance," in concentrations, which exceed applicable cleanup standards. Such materials include substances that are toxic, ignitable, corrosive, reactive or toxic as defined under the Environmental Protection Act.

10. What are the potential dangers to human health from contaminated land? Answer:

Possible risks to human health include eating food plants that have grown in contaminated soil, ingesting or inhaling contaminants (for example, breathing in dust, or drinking contaminated water), and skin contact with contaminated soil.

11. What are the potential dangers to the environment from contaminated land? Answer:

Some possible effects are the pollution of rivers and water courses, odour, poor soil quality which then inhibits plant growth, and discolouration of buildings.

There are also economic factors such as a drop in land value, and delays in selling or developing land.

12. What site cleanup standards are used by your industry? Answer:

Cleanup standards are developed by various environmental regulatory authorities, and are usually based on protection of the human health and the environment.

Ontario has one of the most conservative sets of site cleanup guidelines in Canada. For instance, for soils and groundwater, we have the MOE's Soil, Groundwater and Sediment Standards for Use Under Part XV.1 of the Environmental Protection Act (March 9, 2004), which specifies acceptable limits on contaminants at agricultural/residential sites and commercial/industrial sites and considers whether the project area uses well water as a potable supply or not.

13. What are the benefits of developing a Brownfield site? Answer:

Brownfields redevelopment benefits the community by reducing environmental hazards, creating new business opportunities and restoring blighted areas to productive use. Brownfields may be located near potential markets and labour, and their redevelopment may be less expensive than developing previously undeveloped land because roads and infrastructure are already in place.

14. What is a Site Specific Risk Assessment? Answer:

A Site Specific Risk Assessment (SSRA) is a study that offers an alternative to site cleanup, which can sometimes be illusive or cost prohibitive to achieve.

The process is recognised by the MOE site cleanup guideline and considers the real risks to human health or the environment from evaluation of the contaminant toxicology, site characteristics, and the pathways of exposure to humans or the environment. For instance, for a brownfield, if a contaminant lies in the groundwater at significant depth below grade, and is contained under a concrete floor slab or a paved parking lot, an SSRA would likely have a favourable outcome.

This approach, although time consuming, would cost some 50 to 70% less than a conventional remedial alternative.

Phase I vs. Phase II

Environmental Studies….

When purchasing a commercial property, it is always a smart move to conduct an environmental assessment during your Study Period. Although there are many types of assessments which can be done, the most common in Maryland are Phase I and Phase II environmental studies. If a lender is involved, it will often dictate what type of study needs to be done, however, even without a lender, a minimum of a Phase I study is recommended.

What's the difference?

Generally, a Phase I study consists of a record search within a 1 to 3 km radius of the property. The record search is to find contamination in the area or specific problems with neighbouring properties.

It will review local, state and federal environmental databases. The environmental company will also review the following items:

1) The historical use of the property and the neighbouring properties
2) The legal description of the property
3) Hazardous substances identified on the property or believed to have been used on the property. As part of this process they will often interview current owners and past owners who may be knowledgeable about the property.
4) Wetlands on or near the property
5) Above ground and underground storage tanks
6) Electrical transformers and equipment which may contain PCB's
7) The presence of lead paint or asbestos
8) Any indication of ground water contamination

PHASE II

Generally, a Phase II environmental study is "triggered" by a Phase I study which indicates a problem in any of the above areas. Depending on the problem found, a Phase II study generally involves taking soil and water samples on and near the property and can involve installing monitoring wells. If indicated, a broader sampling of any materials believed to contain asbestos and or lead will also be done.

Naturally, there is a great cost differential between a Phase I and Phase II study. In Maryland, a Phase I study costs approximately $2,000 while a Phase II study can cost over $10,000.

The critical element is to have the studies completed during your Conditional Period so that in the event problems are found, they can be rectified or you can "mutual release" out of the contract and receive your deposit money back.

A few key points to remember --

1) All lenders have a list of environmental companies on their "approved list" -- these may or may not be the best environmental companies to use.
Ask your lender who's on the list and consult with someone else (preferably a knowledgeable commercial real estate broker) to see if there's a better company in the area.

2) Typically the lender has to order the environmental report (even though you pay for it) and it may be returned in their name -- this means that they are the ones protected by the Liability Insurance of the environmental company. Always try to have the report issued in your name as well.