Need a Phase I or II ESA? ---- Read this first (Part 2)

In my last post we saw how Ontario’s new “Brownfield” legislation has resulted in:

1. Phase I ESA’s costing more and taking longer.
2. More Phase II’s ESA being recommended.
3. Property owners receiving copies of Phase I & II’s, regardless of who orders them.
4. 65% of pollutants having more stringent guidelines, including the most common offenders (wastes from motor oil, gasoline and dry cleaning solvents).

You can refer back to September 14^th blog for details.

Additional implications of the new regulations are as follows:

5. More sites will not 'pass the test'.

The new Ministry of Environment (MOE) regulations on how Phase I's are prepared will result in more Phase II's ESA being recommended.  Also the new regulations have imposed lower thresholds for the most common pollutants.

Result: More sites will be deemed ‘contaminated’.

6. Developing a property requires a Record of Site Condition (RSC).

While this is not new news perse, in order to get a RSC approved the supporting Environment Site Assessments (Phase I and II) and remediation reports (if applicable) will have to meet the MOE standard. Therefore Phase I and II’s done to the CSA standard will not be accepted.

Result:  Getting approval for a RSC (necessary condition on most commercial deals and required by municipalities to approve redevelopment) will be more difficult.

7. Sites not being redeveloped can use the CSA-standards for Phase I and II ESA’s...

...BUT most financial institutions have adopted the new (stricter) MOE-standards into their underwriting guidelines*.

*Many bankers I have talked to indicate that in some cases (ie. mortgage refinance on a site with ‘lower risk’ activities) the CSA standard will be permitted. Tip: check with the bank first before ordering a report.

Need a Phase I or II ESA? ---- Read this first (Part 1).

For those in the commercial real estate industry, our business has been changed by recent amendments to Ontario’s "Brownfield" legislation.

When I do presentations I often get asked:  “How does the new law impact me and my clients?”

Over the next two posts I will present my list of - What you need to know about Ontario’s new environmental regulations.  While this is not an exhaustive list, it is my goal to highlight the changes and implications of new regulations so you will be able to respond appropriately to any environmental situation. 

1. Phase I ESA's will take longer and cost more.

The new regulations require investigating the complete historical uses of all properties within 250 metres (instead of the old CSA standard of investigating just the immediate neighbours). 

Result: Better quality reports industry-wide, but plan on 3 – 4 weeks and $3000 - $4000 on per report. Beware: a $2000 Phase 1 will probably not meet the new MOE standards.  

2. More Phase II ESA's will be required.

The inclusion of Potentially Contaminating Activities (PCA) in the new regulations mean that if an industrial activity has ever occurred at the subject property, the soil and groundwater will likely have to be tested for contamination. (See my blog on May 4, 2011 for the complete list of PCA’s).

Result: More properties will fail for contamination by virtue of more Phase II’s being completed.  In addition if the Phase II is a condition for a transaction (purchase or refinance), remember it will take 4 – 6 weeks and will cost $8,000 - $10,000 on average.

3. Property owners receive a copy of Phase I & II ESA reports.

Result: Regardless of who orders the report(s) this amendment means property owners will have to be more forthcoming about the environmental conditions of their site(s).

4. More stringent guidelines for 65% of pollutants.

Included in this list are common contaminants related to gas stations, automotive repair and dry cleaning activities.  

Result:  For some properties these new numbers will be very difficult, if not impossible, to achieve. For those sites only option for obtaining a Record of Site Condition from the MOE will be through a Risk Assessment. (Remember: a Record of Site Condition is required by most banks as evidence that a site is “clean”)

If you are going the Risk Assessment route be aware they can take many months to complete (forget the 90-day close), and there are no guarantees the MOE will accept a Record of Site Condition based on a Risk Assessment.

Although we are only a weeks into the new regulatory regime, this could prove to be a real bottle-neck for one of the Ministry of Environment’s stated goals for the new regulations: streamlining processes related to remediating contaminated sites.

More on Risk Assessments and other important regulatory changes in next week’s blog.

Greenfields become Brownfields. Increased Costs for Real Estate development in Toronto, GTA and Ontario.

If you have read any of my recent articles on amendments to Ontario's environmental legislation, O. Reg. 153/04, you know that the due diligence process for Phase 1 environmental site assessments will become more complicated on July 1st.

Phase 1 ESA’s will now investigate at larger 'Phase 1 Study Area', and consider more activities that could contaminate the subject property. This is going to result in more Phase 2 environmental site assessments being recommended, to test the soil and groundwater for environmental contamination. While this will cost property owners more time and money, of greater concern is whether the property will pass or fail the lab tests.

In the commercial real estate world timelines can be, and often are, adjusted. And an extra $10,000 or $15,000 in fees usually won't upset a multi-million dollar transaction. But if the site is found to be contaminated this is usually a 'deal killer'.

Environmental contamination is a ‘Deal Killer’

One of the goals of the new legislation is to recognize developments in science regarding the impacts of pollutants on humans and the surrounding ecology. 65% of pollutants will thus have more stringent numbers in the new regs. And some of the most common offenders – chlorinated solvents, oils and gas - will see significant reductions in their limits.

Therefore after July 1st we will see many more properties being tested, and more properties failing, under the new stricter guidelines. Whether you live in Oshawa, Kitchener, Peterborough, Barrie, or Mississauga - it's assured you will have more contaminated sites.

There is however hope for some contaminated sites, often referred to as ‘Brownfields’. The Ministry of Environment has introduced a new "Modified Generic Risk Assessment" (MGRA) model, which will allow some contaminated sites to be deemed acceptable for redevelopment (which is one of the stated goals of the new legislation: streamlining the process for redeveloping Brownfield sites).


Next week: Are Risk Assessments risky?

Phase I and II Environmental Site Assessments, Toronto and beyond. Why are they costing more?

In the last blog we saw that whether you're in Toronto, London, Ottawa or even Sault Ste. Marie after July 1, 2011 a typical Phase 1 environmental site assessment will cost commercial real estate clients more money and take longer to complete.

Leaking drums at a GTA site

While many commercial real estate professionals are upset with this, there are even more significant changes that could make a 60 or 90-day close on commercial / industrial properties a thing of the past.

Amendments to Ontario’s regulation, O. Reg 153/04, Records of Site Condition, make reference to a seemingly innocuous term called "potentially contaminating activities" (PCA). PCA's are industrial activities which produce pollutants that could contaminate a property, and the Ministry of Environment (MOE) has indentified 71 different PCA's.  Examples include paint manufacturing, metal working, fuel storage, etc. (See May 4, 2011 blog for the complete PCA list).



"Brownfield" site, Toronto

 PCA's are actually well known in the environmental engineering field, but the new regulations require that when a PCA is found at a site currently or anytime in the past, then the Phase 1 report must recommend that a Phase II environmental site assessment be performed to test the soil and groundwater for contamination.

In essence the MOE is taking decision-making out of the hands of the engineer and requiring them to recommend lab testing to ensure the site is clean. While this attempt to remove human error or human influence from the process may be well-intended, the resulting financial implications for commercial deals will be significant.

More commercial and industrial properties will require a Phase II ESA and have lab results confirm the site is “clean”, in order for a transaction to be approved by a bank or finance company.

The costs of a Phase II vary with each property but here is a general rule of thumb: a Phase II environmental site assessment done on a 1.5 acre industrial property with a 10,000 square-foot building will run approximately $10,000-$15,000. That’s not too bad but the problem is the extra time it will take to complete the Phase II ESA: 4 - 6 weeks.

However having to get a Phase II ESA is not the biggest concern. More important is whether the site passes the lab tests for environmental contamination. In the next blog we will discuss the implications of Phase II’s and why more sites will fail under the new guidelines.

Next week: How Greenfields become Brownfields.

Why Phase 1 ESA's will take longer and will cost more in Ontario

As we discussed in the last blog Ontario’s new environmental legislation, Ontario Regulation 153/04, Records of Site Condition, will become law on July 1st.

One of the main goals of the new legislation is to "streamline" the site assessment process, thereby allowing contaminated properties to be remediated more efficiently.

However for Phase 1 Environmental Site Assessments (ESA) “streamline” does not mean “quicker” or “less expensive”. Read on.

Under the new regulations the QP (“Qualified Person”) who prepares the report must consider the impact of all properties within a 250 metre radius of the subject, what is known as "Phase One Study Area". While it has always been within a QP’s discretion to investigate any property near the subject, in practice most Phase 1’s only considered the immediate neighbours.

And given that the QP must research both the current and historical usage of every property within 250 metres, this alone will significantly increase the time and cost of a Phase 1 ESA. Regardless of whether it is a major Brownfield cleanup in Hamilton or a simple commercial condo sale in Toronto.  

A recent survey of leading environmental engineering firms in Ontario indicated the average Phase 1 ESA will take 10 days longer to prepare, and will see costs increase from an average price of $3200 to over $5000 (in some cases firms are simply doubling their prices).   

Next blog we will look at an even greater impact on environmental costs for a typical commercial/industrial transaction: “Potentially Contaminating Activities”.