Who has the dirtiest job in commercial real estate? Cory welcomes Shane Rigter from Next Environmental, a leader in environmental testing in the commercial real estate industry. When buying a commercial building or property, ever wonder how the soil can impact your purchasing decisions? Shane breaks down what this is all about and how federal and provincial regulations have impacted this part of the industry. All commercial land owners, and future land owners, need to grab a notepad, pull up a seat, and hear how the dirt below your feet can affect you buying the building above the surface.
Vancouver Real Estate News, Market Updates, Insider Tips, Stats, & Analysis
Please tell us about yourself.
I did my education in environmental sciences and bounced around a few different industries. I had an interest in real estate from an early age and found a position with Next Environmental that was a good fit. I’ve learned a ton over the last half decade in the business.
Why do lenders require environmental reports?
A lot of people are sticker shocked by the hoops they have to jump through to do their due diligence and secure their financing. Environmental is a broad and loose term; the one most commonly seen in real estate is concerning contaminated sites. That’s what banks are most concerned about, as the liabilities can skyrocket. So they’ll look to professionals for their expertise on what the likelihood of contamination is.
What is the process of working with Next Environmental?
The rules have progressed quite quickly. Initially, we do a Phase One Environmental Site Assessment. In BC we also have a separate set of regulations we have to follow. The first question we ask is what are the business goals. That will drive what regulations we have to follow. Once we have those goals, we can advise accordingly.
Do you need an environmental test to buy commercial real estate?
Not necessarily. It depends on the lender’s risk threshold. If you’re buying a low risk building that was built in 2017, the lender might waive the environmental test since the liability isn’t there. So it depends on the asset class, property type, business goals and the lender’s risk tolerance.
Are certain industries riskier and more likely to contaminate the soil?
Due diligence is so paramount, especially from an environmental standpoint. Gas stations, auto mechanics and dry cleaners may not be as clean of an operation as a warehouse that stores dry goods. If you have a former gas station on a property you want to redevelop, instead of getting a Phase One Site Assessment, you need to now get Stage One and Stage Two tests through the BC Ministry to even get a permit from the municipality. And that’s just step one.
You have to look at these properties with a real magnifying glass and address issues right up front.
What’s the difference between a Phase One and a Stage One assessment?
They are very similar but the Phase One is used to facilitate financing. A Stage One is a requirement from a development standpoint in order to obtain permits from any municipality in BC when there is or was a high risk operation on site.
Is it a good idea to get an environmental test even if the lender doesn’t require it?
Based on what I’ve seen, I’d always get a test done. Too many times have I seen investors with “good deals” discover problems down the line. But it is case by case. If you think there’s some history on the property or around the property, I’d do the environmental so you’re in the clear. You want to know what you’re getting yourself into so there’s no surprises down the road.
What are the most common sources of contamination that you see?
A big suspect is actually dry cleaning solvents, which many people don’t know about. They can contaminate full city blocks and don’t dissipate over time. Hydrocarbon, gasoline and oil spills are problems. Underground storage tanks that degrade over time are a problem as well.
There wasn’t as much regulation with dry cleaners in the past but nowadays, there’s less of an environmental impact with the current chemicals used and disposal methods. Prior to 1997, it was the wild wild west when it came to environmental remediation.
What happens if my property is contaminated because of something happening on a neighbouring property?
This is something that is all too common. The polluter in the end pays. But the affected parcel, your property in this example, is still a piece of contaminated land and you will probably have to front the costs. You can go after the polluter but it can be a long process.
When you buy a property without doing an environmental assessment, you are buying any liabilities. It’s important to understand those liabilities upfront.
Disclosure at the time of sale is very important. If the seller doesn’t disclose something like an underground tank, that can come back and bite them. But if everything is disclosed and you move forward anyway, you now own that liability.
What are the costs associated with an environmental test?
When you call and ask for a Phase One Environmental Report, that’s the starting point. I’ll talk to you about your business goals. A Phase One is a professional opinion on the likelihood of contamination on a site. We’ll do a site visit, take photos, interview people, conduct historical research, and amalgamate all the data into a comprehensive report. We’ll then tell our client our opinion on the likelihood of contamination and whether we think further testing is needed. The cost for this would be about $2000-3000.
You want to make sure that the environmental consultant you choose is on your lender’s approved list. There are low-ball estimates out there but your bank may not accept those reports.
What is the next step and costs for further testing?
I tell people Phase Two is about 10x the price of Phase One, so anywhere from $15,000-30,000 depending on the complexity of the site. It can escalate to $100,000 for larger sites with lots of problems.
When it comes to strata, liability is shared across the board. With strata properties, we can typically defer testing if there aren’t development plans. If you’re buying a freestanding building as the sole owner, the bank is more worried compared to a strata property where the bank has lots of owners to share the liability.
Are the rules different in different parts of BC?
There was a major regulatory update in February which blanketed the entire province under the same rules and regulations. Before that, you could go to certain areas of the province and you’d be exempt from the site declaration process. Permits would get pushed through faster. But now no municipalities are exempt. This way, nothing can slip through the cracks.
Are there any cities/municipalities with a history of more contamination?
Places like New West and anything along the shoreline where historical shipping and industrial usage occurred is more indicative of contamination. Victoria has a pretty rough history too and we see problematic sites out there.
Can you share a horror story with us?
A client purchased a property 25 years prior in cash, sight unseen, with no awareness of environmental regulations. The client then went to sell and found out about dry cleaning contamination from the owner prior which had spread a city block and a half to all the neighbouring properties. So the client was trying to sell but the liability was too immense. They’re now stuck with a property that is potentially worthless with liabilities on top of that.
Find out more https://www.nextenvironmental.com/