We complete due diligence (whether we realize it or not) for just about everything in our lives; from purchasing clothing to buying a car. The same applies to the purchasing of property whether developed or not. Property transactions in the past were relatively simple and likely included a walk of the property and an agreed upon transaction price. Much has changed since those simple times — guidelines, regulations, standards, protocols, and databases have been developed to provide a standardized industry review process for environmental and building condition assessment during real estate transactions.

Due diligence may include:

• A Phase I Environmental Site Assessment (ESA);
• A Baseline Property Condition Assessment (BPCA);
• A Phase II ESA (usually based on the conclusions of the Phase I ESA); and
• Remediation or completion of a Risk Assessment if the property is contaminated.

As a minimum, the Phase I ESA and the BPCA should be completed and be conditions for a property transaction.

Phase I/II ESA

Typically, a Phase I ESA is completed using a standardized approach to identify and document potential environmental impairment, risk or potential liability. In 2001, the Canadian Standards Association (CSA) developed a guidance document for completing Phase I ESAs known as CSA Z768-01. The purpose of CSA Z768-01 stated that a "Phase I ESA is to identify actual or potential site contamination" and was developed to:

• Assist in reducing uncertainty about potential environmental liabilities;
• Assist in making informed decisions about property transactions;
• Identification of baseline environmental conditions;
• Assist in meeting regulatory requirements (not a compliance audit); and
• May be a basis for further investigations on a property.

As part of the Phase I ESA, a review of current and historical records is completed to evaluate the environmental status of a site based on an examination of past and current land use practices and activities conducted at the property. The records review typically includes fire insurance maps, aerial photographs, Property Underwriters reports/plans, Municipal directories, title searches, any previous environmental reports, and regulatory searches such as Ecolog ERIS, Technical Standards & Safety Association (TSSA), and the Ontario Ministry of the Environment and Climate Change (MOECC) database.

The Phase I ESA may identify that past or current operations have or have the potential to contaminate the property. The MOECC has a list of over thirty property uses/activities that can result in property contamination included in their Brownfield Regulation (Ontario Regulation 153/04). In this case, a Phase II ESA may be recommended to assess the quality of soil, surface water and groundwater conditions at the property.

Baseline Property Condition Assessments

Similar to a Phase I ESA, a BPCA provides a comprehensive assessment of building systems for building owners, purchasers, financial lenders, insurers and facility managers since all are stakeholders that have an interest in the value of a real estate asset. A BPCA consists of an on-site inspection of the building(s) which is used to gather information and record on-site conditions and deficiencies.

BPCAs are conducted in accordance with ASTM E 2018 – 15 and include evaluation of the following building systems:

• Roof Systems
• Wall Systems
• Structural Elements
• Vertical Transportation Systems
• Interior Finishes
• Site Features
• Mechanical Systems
• Electrical Systems
• Fire Protection and Life Safety Systems

Knowing if large capital expenditures are required to keep the building in "good working order", now or in the near future, can affect the proforma and return on investment. Having the knowledge of a BPCA means a plan can be developed for these expenditures that will help with forecasting cash flow, tenant disruption, and expectations for investors.

A BPCA and a Phase I ESA provide a clear understanding into the current condition of assets and property and are essential to limit risk and make informed decisions on real estate purchases. EA and BPCA due diligence should be undertaken only by a highly trained consultant and as always, a competent Property Manager can help with this process.

Acknowledgements: Paul McVeigh, Director of Finance, Armadale Property Management; Elizabeth Whitton, Director of Marketing and Leasing, Armadale Property Management; Robert Daciw, Director, Real Estate Due Diligence, Pinchin Ltd.; Robert Tossell, Director, National Remediation Services, Pinchin Ltd.