How to Deal With Bumps in the Due Diligence Process…

Sometimes you simply have to pull the trigger on an acquisition.

Whether you’ve been inactive for too long, have to meet requirements of a mandate, or lost out numerous times to competitors in scooping up prized assets. 

The windows of opportunity don’t stay open long, but you need to ensure proper due diligence and investment requirements.

Even worse, in a Seller’s market, the inventory of product is limited, and so, you may only have imperfect opportunities available…

So when you identify any potential roadblocks, you need to have to a strategy and process in place to deal with them…

Because unlocked (and maximized) value really goes to the person who is best prepared.

Overall, you must protect yourself and your investment throughout the entire process – from analysis, identification, and remediation to negotiations and securing financing – no matter how costly or scary that may seem to you – unless you’re willing to risk time, leverage, positioning, opportunity cost, and the integrity of your asset.

So how can you ensure you implement this process properly?

Well, in this article, we will outline some steps you can take to move forward and get back on track – using another real-life case study. 

We are into the sixth issue of our series on Due Diligence, where we are diving into the different types of due diligence, case studies of successful assessment and remediation, and what exactly to look out for when buying or selling properties. 

Today we will examine our third case study. So let’s begin…

77,267 SF Industrial Building,

Markham, Ontario

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Project Overview

Cushman & Wakefield’s Team of Goran Brelih & Diana McKennon were mandated by the property owner to assist in the acquisition. 

A Phase II ESA report was provided by the Vendor to the Purchaser which identified PHC impact in groundwater samples, most likely coming from the former oil distribution facility and oil storage tanks located on site.

In addition, there were elevated EC and SAR levels in the soil and groundwater samples, as well as elevated sodium and chloride in the groundwater sample; which would typically be due to winter road salt applications.

It was recommended that an additional investigation be conducted to further assess and delineate the PHC impact so that a remedial action plan could be developed. 

The focus of the Supplemental Phase II ESA program was designed to delineate the PHC previously identified. The work program consisted of 9 sampled boreholes, whereby all 9 soil samples were found to have met the applicable site conditions standards, while further groundwater investigated delineated hydrocarbon impact laterally and vertically. 

An environmental engineering firm, specializing in remediation, provided a quotation to complete Insitu chemical oxidation with two rounds of injections. 

A mixture of sodium persulfate activated with sodium hydroxide was used to remediate the impact of the hydrocarbons in the groundwater. The oxidant mixture was delivered via 8 push rig injections with the estimated time frame for remediation of 2-6 months.

The remediation strategy stated that a 1-2 month waiting period between injections was necessary to allow the oxidant reaction to complete.

It was recommended that groundwater samples be taken 60 days following the second injection, in order to determine if additional injections would be required. The first two rounds of 8 injections were completed at a cost of $34,000.00, with each subsequent injection going for $15,000.00.

 

Final Outcome:

A post-remediation confirmatory investigation was conducted to confirm that site conditions were restored to Table 3 standards.

A remediation program was fully completed prior to the date of closing. 

Financing was secured by a tier 1 Canadian bank, accounting for the site still being impacted, but with a remediation plan and program in place. 

Finally, a hold-back clause in favor of the Purchaser was negotiated as follows and inserted in the Agreement of Purchase and Sale: 

“The Seller hereby undertakes to complete the remediation of the Property, at its sole cost, as set out in the Supplemental Phase 2 ESA (the “Remediation”). The parties hereby acknowledge and agree that if the Vendor has not completed the Remediation prior to closing, the parties shall still be obligated to complete this sale transaction on the closing date, as set out in this Agreement, and the Vendor’s solicitor shall hold back in its trust account the sum of $50,000 (the “Holdback”) from the balance due on closing, until the Remediation is completed. The Vendor shall continue to be responsible for the completion of the Remediation after closing. The Holdback shall be released to the Vendor upon delivery to the Purchaser and Vendor’s solicitor of written confirmation by the Environmental Consultant or the Vendor’s contractor that the Remediation is complete. The Vendor, Purchaser and Vendor’s solicitor shall enter into a holdback agreement on closing to be prepared by the Vendor’s solicitor which shall be substantially and materially on the terms set out herein.” 

Most importantly, based on all the work completed and based on the final Site Remediation Closure Strategy that was put in place, the Purchaser was able to secure financing for this site and Vendor was able to conclude the sale with minimal impact on the final price/value.

Result: Transaction Successfully closed. 

 

**Disclaimer: The information provided is intended for general educational and informative purposes ONLY, and is NOT intended to be taken as legal, environmental, or tax advice.

Talk to your lawyer, accountant, attorney, or environmental or planning consultant before taking action.**

I hope this can give you an idea of the general process used when doing an Environmental Site Assessment, Remediation, or Cleanup. Please note, that each case is unique and would require an expert opinion and guidance.

If you would like some help with your property, let us know, and we will do our best to point you in the right direction.

Next time, I will be going over some insights and lessons learned from some of North America’s top brokers, investors, and developers at the SIOR Spring World Conference in Washington, D.C.

Until then…

 

Goran Brelih and his team have been servicing Investors and Occupiers of Industrial properties in Toronto Central and Toronto North markets for the past 25 years.

Goran Brelih is a Senior Vice President for Cushman & Wakefield ULC in the Greater Toronto Area. 

Over the past 27 years, he has been involved in the lease or sale of approximately 25.7 million square feet of industrial space, valued in excess of $1.6 billion dollars while averaging between 40 and 50 transactions per year and achieving the highest level of sales, from the President’s Round Table to Top Ten in GTA and the National Top Ten.

Goran is currently serving as President of the SIOR ‐ Society of Industrial and Office Realtors, Central Canadian Chapter and on the Board of Directors of Muki Baum Accessibility Centre, a Toronto‐based NGO which provides support to children and adults with complex disabilities.

Specialties:

Industrial Real Estate Sales and Leasing, Investment Sales, Design Build and Land Development

About Cushman & Wakefield ULC.

Cushman & Wakefield is a leading global real estate services firm that delivers exceptional value by putting ideas into action for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with 48,000 employees in approximately 400 offices and 70 countries. In 2017, the firm had revenue of $6.9 billion across core services of property, facilities and project management, leasing, capital markets, advisory, and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.

For more information on GTA Industrial Real Estate Market or to discuss how they can assist you with your real estate needs please contact Goran at 416-756-5456, email at goran.brelih@cushwake.com, or visit www.goranbrelih.com.

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