Pointers on Contaminated Site Transactions

Background

Developers, agents and lenders recognize the increasing need to gain a better understanding of contaminated site transactions as the availability of uncontaminated properties for development continues to decrease. In fact, some developers are becoming experts in the remediation of these sites and are openly targeting brownfield sites as an opportunity to get a leg up on their competitors. But, these sites are more affordable and available for a reason, they come with more risk. Therefore, controlling costs is also increasingly important as the market inflation has continued to taper off, reducing the ability to rely on sale price increases to offset costly mistakes. This changing market momentum also puts pressure on market timing, which was the primary problem in our first case study below. Few would argue that contamination issues are an important source of transaction time and cost uncertainty.

CASE STUDY 1

An unnecessary delay in getting municipal permits

Last week a Developer called me on the recommendation of a well-known real estate agent. The Developer needed a Development Permit within three months to meet his market timing requirements for a recently acquired property. In conducting his due diligence on the property, the vendor's consultant informed the Developer that the property was not contaminated on the strength of a Phase 1 and Phase 2 Environmental Site Assessment conducted in December 2010. The Developer was also told there was no further work needed to satisfy the Ministry or the City. The vendor's consultant even provided him with Reliance Letters in December 2011 entitling him to use the Phase 1 and 2 reports. So why did the Developer call me?

What happened

After proceeding with the purchase and applying for the Development Permit, it became clear that the City would not issue the Development Permit without additional investigation being completed. In response to his Site Profile [1] submitted with the Development Permit application,  the Developer and the City each received a letter from the Ministry of Environment ("Ministry") informing them that a "Preliminary Site Investigation" was required. Furthermore, the letter noted that a Development Permit could not be issued without Ministry authorization. What went wrong in this case?

The Developer's problem was entirely preventable.

Diagnosis

Problem 1 - Phase 1 and 2 Reports.The cost and time disappointment arising from issuance of Phase 1 and 2 reports is one of the most common problems and sources of confusion in our industry. The Developer was misled when advised to rely on the Phase 1 and 2 reports, which the consultant knew did not meet Ministry requirements. Now cost and time would be required to upgrade the reports (if possible) to a Stage 1 and Stage 2 Preliminary Site Investigation, as required by the Ministry.

Learning point 1:  Phase 1 and Phase 2 Environmental Site Assessments DO NOT meet Ministry (or lender, if lenders only knew) requirements. Never accept them as substitutes for Stage 1 and Stage 2 Preliminary Site Investigations. If provided with such reports, retain a good consultant (typically, one who would not provide Phase 1 and 2s in the first place) to advise on their adequacy for a regulatory upgrade.

Problem 2 - Changing regulations.  To make matters worse, the Developer was not informed that the Phase 2 for which he received a Reliance Letter was outdated. An important new Ministry regulation had come into effect in the preceding year. This detail alone risked transforming the Phase 2 conclusion from uncontaminated to contaminated.

Learning point 2: Do not assume a Reliance Letter written long after a report confirms current regulatory requirements are met. Ask whether the consultant has taken your needs into consideration when issuing that letter. Regulations often change, the consultant may not owe you a duty of care, and you may be left holding the bag.

Problem 3 - Time Needed for Ministry Authorization. Even if the site was uncontaminated, the Developer should have been told that the City still needed Ministry authorization to issue the Development Permit. This would require at least 3 months if no obstacles were encountered. If the application for Ministry authorization was selected for random audit (which occurs 1 in 8 times), then the approval process could easily take an additional 3 to 4 months or more.

Learning point 3: Always try to apply for municipal approvals and permits as soon as possible in anticipation of the need to update reports, of Ministry processing backlogs and of a potential audit. 


 

Harm Dr. Harm P. Gross
President
NEXT ENVIRONMENTAL INC.
215  -  2550 Boundary Road
Burnaby, B.C.  V5M 3Z3
Dir: (604) 419 - 3838
Cell: (604) 220 - 0021
Email: hgross@nextenvironmental.com
Web: www.nextenvironmental.com

A message from Harm:
Some of you have met me at NAIOP events, but perhaps we haven't had a chance to chat about how NEXT can add value to your next development project involving a contaminated site. Over the next few months, I will be writing several blogs demystifying the contaminated sites process for developers, real estate agents and lenders. I will use the proven case study approach, and provide regulatory and technical footnotes when I think they are needed. I hope you'll find these blogs provide insight and help your day-to-day real estate business. If you need more detail on any topic, please feel free to call me, or catch up to me at our NAIOP events. Good luck in your transactions! 


[1] A Site Profile is a document which must be submitted to a municipality under the Contaminated Sites Regulation, Land Titles Act and Local Government Act (or Vancouver Charter) if there has been a Schedule 2 Use on a property, before the municipality can issue an approval or permit for development, rezoning, subdivision and associated land use changes. The municipality in turn submits the Site Profile to the Ministry of Environment for review. 

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