I get asked all the time, "What is the risk of buying a contaminated property?"
It actually makes me angry when I hear this. I'm not angry at the person asking the question, but I'm angry at the owner who is selling the property, the Agent/Associate who is listing the property, and everyone else involved in the property.
Sophisticated buyers don't ask this question, so I'm stuck explaining the answer to a relatively inexperienced potential buyer. And regardless of what I say, I know there is a chance that all they will hear is "Waa Waaa. Wa Waa Waaaa..." and they'll go buy the property anyway.
The following is a quick synopsis of the speech I'm all too familiar with delivering...
- Expensive cleanup. Environmental companies charge a small fortune. They also have to protect themselves from liability, so their reports are filled with 'In our opinion...' and 'With the information provided to us...' and 'From what we know at this time...' thereby putting all the risk on the property owner. They are by no means written-in-stone factual reports. If the property is more contaminated than they originally thought, it just means the owner pays more than they expected... end of story. How can you make any decisions based on such wishy-washy reports?
- Why take on someone else's problems? In my opinion, the owner(s), who owned the property when it was contaminated, should seek the cause and work to clean it up. Period.
- If the property was passed down or willed to the current owner, that person should hire an environmental consultant to explore remediation options.
- Contamination that seeps under a building or past property lines. More often than not, if there is a small amount of contamination in the middle of a vacant piece of property, the property is cleaned up quickly and the problem is solved before the property is listed for sale. Only desperate sellers try to sell a piece of property they know is contaminated, and don't have the resources to clean up. More often, however, the contaminated properties that are for sale have a plume that goes under a building, onto the neighbour's property, or under the public roadway. When this happens, the costs rise exponentially. What's worse than the 'high costs' is the 'unknown costs' - it is next to impossible to cleanup some contaminants under a building or roadway without digging up that building or roadway.
- If you have owned a gas station property for many years, with $300,000 in equity built up over time, you may decide to spend what you expect to be $100,000 to start cleanup and end with a bill of $400,000. This money is worth spending to clean up the property (the ethical and morally proper thing to do) and to sell the property with a clean environmental (the legally proper thing to do). This is somewhat justifiable, as the gas station likely created profits for you as it was contaminating the ground, and it is your duty to clean it up.
- Financing. Because of this growing issue, banks and other lending institutions are increasingly requiring phase 1, 2, or 3 environmental reports on all types of commercial property. These reports range from $3,000 to $40,000+ depending on the size of the property or extent of study needed. You can spend $10,000 or more on phase 1 and 2, which just define the known scope of the problem, but don't actually clean up the property.
- "But I don't need financing..." (said with a proud tone). Yes, but 95% of commercial properties are used as security for financing in some form or another. When you (or your heirs) go to sell this property, they will have 25 people look at the property, and only one or two of those people 'could' pay cash. Now you have to pray they are also oblivious to contamination rules, remediation laws, financing impacts, etc.
- "If it was that bad, the municipal, provincial or federal government would force someone to clean it up." Although this is a decent solution, this is seldom the case. Often the property sits dormant until an unsuspecting buyer comes along. Alberta Environment seems to tackle some properties quicker than others, and I feel they are getting more strict every year.
The reason I chose to write this blog is because I heard of a nice guy, who is a friend of many of my friends, who was considering a known contaminated building. I went out of my way to contact this fellow, sit him down and explain to him the impact of what he was about to do.
He thanked me for my explanation, we shook hands and he left. I felt good about sharing my knowledge, and went on to work on my own deals. Last week (six months after my talk with this guy), I heard he had his parents refinance their house and lend him hundreds of thousands of dollars to purchase the contaminated property.
If this is true... shame on the parents, shame on the seller (a financial institution), shame on the municipality, shame on any agents/advisors who assisted the buyer, and pity for the buyer.