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SIPP property purchases – environmental risks

John Keenan, corporate development manager, Xafinity looks at Environmental Screening Reports when buying commercial property for a SIPP

The purchase of a commercial property or land might be the single biggest investment a self invested pension scheme ever makes. It is vital that a balanced view in terms of risk and reward of the investment is taken based upon all the information available. One of the most important areas of the due diligence process should be environmental due diligence on the property/land itself.

When it comes to environmental law, if land is found to be contaminated and the person that caused the contamination cannot be found, then the local authority can look to the current owner in order to meet the clean up and removal costs of that contamination. This means if the property or land is owned by a self invested pension scheme and the “contaminator” cannot be found then costs, which can spiral very quickly depending on the level of contamination, can fall on the pension scheme and so have to be met by the member’s pension funds.

The costs could be so considerable that they could deplete the member’s entire pension pot and reach beyond a particular member to create a liability for pension scheme trustees. For schemes operating on the basis where all members are held under a single trust, this would be a serious issue.

Environmental risk assessment

Given this potential risk for members and trustees, most SIPP and SSAS providers will insist environmental risks are mitigated as far as possible before proceeding with a commercial property purchase. The best practice approach is that all proposed purchases go through an initial environmental check using environmental experts. This initial check means that the provider, adviser and client can be confident to proceed where the property is deemed to be “low risk”. Our experience has shown that approximately 80% of properties fall into the “low risk” category.

However, for those properties that don’t pass an initial check it is not necessarily the end of the line, but further checks are needed via an Environmental Screening Report.

Environmental Screening Report (ESR)

An Environmental Screening Report (ESR) will provide a risk rating for the property/land. In reports Xafinity receives from its third party environmental reviewer there are 7 risk categories namely Low, Low to Medium, Medium to Low, Medium, Medium to High, High to Medium, and High. Each SIPP and SSAS provider will have a different view on what they are happy to accept based on their experience. Accepting property or land with a “Low” or a “Low to Medium” risk rating is common across most providers, where it is higher category action may be recommended or required before the purchase can proceed.

Risk reduction recommendations

Some ESRs will make recommendations to the current owners of the property aimed at reducing current and future environmental risks. By carrying out these recommendations, not only will there be a benefit to the environment, but also the value of the property/land investment will be underpinned.

For example, Mr Brown wanted to purchase a former petrol station and motor vehicle servicing and repair centre. Over the years, it had fallen into an appalling state of disrepair. There was oil everywhere with multiple breaches of regulations and the potential for a major environmental incident within an urban area. Following the ESR, the vendor and Mr Brown came to a commercial agreement to undertake the remediation work required, the works of restoration were completed, approved and signed off by the surveyor. The illegal oil tanks were removed together with all rubbish, the buildings were cleaned up and the forecourt remediated resulting in a professional business environment for MOT testing and servicing.

Conclusion

The needs of the scheme beneficiaries should be at the heart of what all providers do and everything should be done to protect the investment and pension benefits the scheme holds.

The impact of a sudden and unexpected flood or other environmental impediment can seriously undermine the ability of the scheme to sell the investment on the open market without a substantial discount. The purpose of an ESR is to underpin this valuable asset. It makes the investment more robust and the value of it more sustainable.

Not only can an ESR support the environmental agenda, but also in many cases, it will make a significant difference to improving the value of the investment; surely a most prudent, and welcome requirement.

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