Environmental concerns can significantly affect the value, financing, insurability, operational viability, and long-term risk exposure associated with commercial real estate.

However, many buyers and investors underestimate environmental risk during the acquisition process — particularly when purchasing:

• industrial properties,
• automotive facilities,
• gas stations,
• manufacturing facilities,
• warehouses,
• older commercial buildings,
• or redevelopment sites.

Environmental issues are not always obvious during property inspections. In many cases, contamination or environmental liability may exist:

• underground,
• within building materials,
• or as a result of historical property use.

In Ontario commercial real estate transactions, environmental due diligence is often one of the most important components of risk management.

Why Environmental Due Diligence Matters

Environmental concerns can create substantial:

• financial liability,
• regulatory exposure,
• operational disruption,
• financing complications,
• and future resale challenges.

A contaminated property may require:

• remediation,
• environmental monitoring,
• operational restrictions,
• or regulatory reporting obligations.

In some situations, environmental liability may survive ownership transfer — even if contamination occurred under previous ownership.

Environmental problems can also affect:

• property value,
• tenant demand,
• redevelopment potential,
• and lender willingness to finance the asset.

Common Environmental Concerns in Commercial Real Estate

Commercial and industrial properties may involve environmental risks relating to:

• contaminated soil,
• groundwater contamination,
• underground storage tanks,
• petroleum products,
• hazardous chemicals,
• asbestos,
• mould,
• PCBs,
• lead-based materials,
• or prior industrial operations.

Certain historical uses may create elevated risk, including:

• automotive repair facilities,
• fuel stations,
• dry-cleaning operations,
• manufacturing plants,
• printing facilities,
• metal fabrication operations,
• and heavy industrial uses.

Even properties that appear clean today may contain legacy environmental issues from prior occupancy.

What Is a Phase I Environmental Site Assessment?

A Phase I Environmental Site Assessment (ESA) is one of the most common environmental investigations used during commercial due diligence.

A Phase I ESA typically involves:

• historical records review,
• site inspection,
• aerial photograph analysis,
• environmental database review,
• and identification of potential contamination concerns.

The goal is to determine whether there are:

• actual environmental concerns,
  or
• indicators suggesting additional investigation may be necessary.

Phase I assessments are commonly requested by:

• lenders,
• investors,
• purchasers,
• and legal advisors.

When a Phase II Investigation May Be Required

If a Phase I ESA identifies potential environmental concerns, additional investigation may be recommended through a Phase II ESA.

A Phase II investigation may involve:

• soil sampling,
• groundwater testing,
• laboratory analysis,
• or subsurface investigation.

Phase II investigations are more invasive and are intended to determine whether contamination actually exists and, if so, to what extent.

The results can significantly affect:

• financing,
• transaction structure,
• remediation obligations,
• and property value.

Environmental Liability Can Be Expensive

Environmental remediation costs can be substantial.

Cleanup obligations may involve:

• soil removal,
• groundwater treatment,
• environmental monitoring,
• building remediation,
• or operational restrictions.

In some cases, remediation costs may exceed the value of the property itself.

Environmental liability can also create:

• delays,
• insurance challenges,
• lender concerns,
• tenant issues,
• or future resale complications.

Strong environmental due diligence helps buyers better understand these risks before closing.

Lenders Often Require Environmental Review

Many commercial lenders require environmental investigation before financing commercial or industrial property.

Lenders may require:

• Phase I ESA reports,
• updated environmental review,
• or confirmation of regulatory compliance before approving financing.

Environmental concerns can affect:

• loan approval,
• financing terms,
• interest rates,
• and loan-to-value calculations.

Buyers should avoid assuming financing will proceed smoothly without proper environmental review.

Redevelopment Properties Require Extra Caution

Redevelopment sites often involve elevated environmental complexity.

Properties with:

• prior industrial use,
• demolition history,
• underground infrastructure,
• or long-term operational occupancy

may contain hidden environmental concerns not immediately visible during initial inspections.

Buyers pursuing redevelopment opportunities should carefully evaluate:

• historical property use,
• remediation obligations,
• zoning compatibility,
• and future environmental compliance requirements.

Environmental Risk Is Not Limited to Industrial Properties

While industrial properties often receive the most attention, environmental concerns may also affect:

• retail plazas,
• office buildings,
• mixed-use properties,
• apartment buildings,
• and vacant land.

For example:

• asbestos,
• mould,
• lead-based materials,
• or fuel storage systems

may exist in older commercial buildings even where no obvious contamination is visible.

Environmental review should be tailored to:

• the property type,
• historical use,
• age,
• and intended future operation.

Insurance and Operational Impacts

Environmental concerns may also affect:

• insurance coverage,
• operational permits,
• tenant occupancy,
• or future leasing opportunities.

Certain tenants may avoid properties with:

• known contamination history,
• unresolved environmental issues,
• or operational restrictions.

Environmental concerns can therefore affect:

• cash flow,
• occupancy,
• financing,
• and long-term investment performance.

Environmental Due Diligence Is About Risk Management

Environmental investigations are not intended to “kill deals.”

Their purpose is to help buyers:

• identify hidden risks,
• understand liability exposure,
• structure transactions appropriately,
• and make informed investment decisions.

In some cases, environmental concerns may be:

• manageable,
• insurable,
• remediated,
• or reflected in transaction pricing.

The key is understanding the risk before assuming ownership liability.

Final Thoughts

Environmental concerns can significantly affect commercial real estate transactions in Ontario.

Strong environmental due diligence helps buyers:

• identify hidden liabilities,
• reduce operational risk,
• improve transaction planning,
• and avoid costly surprises after closing.

Professional commercial real estate advisory involves more than locating properties — it includes helping buyers:

• assess environmental exposure,
• understand operational risk,
• evaluate transaction structure,
• and make informed long-term investment decisions.

Before purchasing commercial or industrial property, buyers should consider obtaining appropriate environmental, legal, engineering, financing, insurance, and operational advice relevant to the specific property and intended use.

Written by Rodney Harvey, Broker of Record at Konfidis, Brokerage providing advisory-focused commercial, industrial, investment, and real estate brokerage services across Oshawa, Durham Region, and Ontario.