WHAT'S A PHASE 1 ESA?
Phase I ESAs are required during a majority of property transactions, whether it may be a commercial or industrial property of interest, an agricultural parcel of land, or a vacant undeveloped lot. Phase I ESAs can also be completed as part of acceptance of a lease agreement, especially if a larger tenant will be occupying a majority of the building. This allows the future tenant to identify existing conditions of the space they are about to occupy prior to conducting their own operations in the leased space. A Phase I ESA allows the potential purchaser and/or leasee to understand if any environmental liabilities associated with the property exist and if any identified environmental risks need to be further explored by conducting an intrusive soil and/or groundwater investigation. These investigations are meant to be conducted during the due diligence period, once a potential purchaser has retained a Realtor to prepare a conditional offer on a property of interest. Failure to address the presence of potential concerns may leave the new property owner or tenant exposed to million-dollar environmental clean-up costs.
What should a property purchaser be aware of once a property of interest has been identified?
What type of property is your Client looking for? Each property type can be associated with different environmental risks often associated with current or past property uses, such as:
Vacant, undeveloped lot
- Historical use of the property included a residential dwelling that was formerly heated by fuel oil
Agricultural parcel of land
- Large-scale applications of pesticides, herbicides and fungicides
- Former or present use of fuel oil for heating purposes
- Types of tenants that previously and presently occupy the building (i.e., on-site dry cleaning and automotive repair operations)
- Historical and current operations occurring on-site (i.e., manufacturing processes and use of hazardous materials)
In addition, the properties in close proximity to the property of interest, can also pose an environmental risk to the potential property. Land uses such as a gasoline service station, automotive repair garage, dry cleaning facility, and manufacturing facility can pose an environmental risk to the property. The surrounding property may have also been a site where a former chemical spill occurred or where hazardous wastes were generated. A Phase I ESA considers all properties located within a 250 metre (m) radius from the Site, which may pose an environmental risk to the potential property. Upon the identification of a potential environmental risk located within the 250 m radius, it is the discretion of the Qualified Person (QP) conducting the ESA to determine the extent of risk (on the Site) that is associated with that property based on length of operations, type of operations, distance from the Site, location, historical records associated with the property etc.
What should a Realtor consider when making a conditional offer?
A buyer and Realtor commonly base their conditional offers on one or more of the following:
- Financing – the buyer receiving the necessary financing to finalize the purchase.
- Home Inspection and/or Building Condition Assessment – the buyer conducting a building inspection to verify the structural integrity and condition of the building and/or conducting a life cycle cost analysis for building components.
- Property Appraisal – the buyer verifying the value of the property.
- Environmental Investigations – the buyer conducting an ESA and being satisfied with the results of the environmental report completed by a consultant.
The Realtor is also responsible for delegating a time period to each of the conditions, based on the length of time required to complete any associated tasks that confirm or refute the buyers purchase. In the case of environmental risk, the Realtor and buyer should consider the following:
- Verify if the financial institution requires the buyer to conduct an ESA as part of their risk evaluation during the pre-approval process.
- Verify if the financial institution maintains a Pre-Approved Consultant Vendor List.
- Verify that the retained Consultant is on the Pre-Approved Vendor List of the financial institution the buyer is seeking financing with.
- Phase I ESA
- Typical turnaround times to complete a Phase I ESA for pre-purchase or financing purposes is three to four weeks.
- Phase II ESA
- Typical turnaround times to complete a Phase II ESA for pre-purchase or financing purposes is four to six weeks.
Contact the Consultant and discuss what timeline is required to complete the necessary investigations (Phase I and/or Phase II ESA), so that the appropriate timelines are included in the conditional offer.
Some property transactions are finalized almost immediately when a Realtor presents an offer that waives any conditions.
Rubidium suggests that the realtor be diligent and retain a qualified consultant to investigate the potential presence of environmental liabilities associated with the property of interest and/or space for lease. It is important that property owners or occupants fully understand any risks associated with a financial investment that may lead to greater risk in the future when the property is relisted for sale or the purchaser decides to terminate a lease and vacate the space.