All properties are different. There is a diverse bundle of characteristics for each property, and a different set of circumstances for each transaction. Due to these variations, a specific strategy to manage environmental risks should be prepared for each property and real estate transaction. Just as each investor needs a financial plan, each real estate owner/manager should develop and employ environmental plans.
A few of the conditions and variables associated with each property/transaction can include:
- price objectives
- risk tolerance
- extent of contamination
- third-party liability
- potential for government funding
- potential for contaminant migration
- site geochemistry
- potential for natural attenuation
No Shortage of Viable Sites with Risks
There are approximately 30,000 properties in Florida that have reported contamination to the FDEP. There are approximately 52,000 registered fuel storage tanks in Florida. There are tens of thousands of generators of hazardous waste, including dry cleaners, automotive facilities, manufacturing plants, industrial properties, agricultural facilities, and golf course maintenance facilities; these are the usual suspects. There are also many other businesses that must deal with this issue on a smaller scale, such as print shops, dental offices, medical facilities and other small-quantity generators of hazardous materials.
The simple fact is that our society is dependent on the use of chemicals. Inappropriate management of chemicals has killed people. There are those who think that the process of environmental assessment is a waste of time and money on some properties—an unnecessary task undertaken mainly to satisfy the underwriters in a large financial institution. But, when buried drums are discovered on a remote former agricultural property, planned for development of single-family homes, that will have numerous lakes for water retention and irrigation wells (both of which could create exposure to the contamination), the value of environmental assessments becomes evident, and makes believers of the few who don’t understand why we do what we do.
Managing Risks = Managing Unexpected Costs
Developers have to manage every penny, or their project can quickly spin out of control. The family business owners who have operated their facility on the same property for decades and are finally selling to obtain their retirement funds must strive to obtain the maximum purchase price (which means minimizing closing costs) in order to protect their life savings. Real estate brokers need to prevent environmental problems from killing the transaction that they’ve invested thousands of dollars of their own money to advertise (and hundreds of hours of their own time in brokerage activities). They must obtain their commission, reimburse their advertising expenses, and compensate themselves for their time.
Commercial lending has become increasingly competitive; environmental assessments are not always required. But low-cost assessments may miss critical evidence, and improper diligence can actually lead to foreclosures if the borrower can’t pay for contamination existing on the property. Lenders are rarely concerned about liability due to the Asset Conservation Act of 1996, but the security on their loan is always at risk if the borrower cannot afford to pay remedial expenses. Foreclosures occur in such cases, and the bank is left with an impacted property that will rarely cover the balance on the loan.
Environmental insurance emerged to protect lenders in these circumstances. Insurance has its benefits to lenders, but it also has other risks and concerns connected to it. When a lender does not require a Phase I because they have environmental insurance to back them up, borrowers typically don’t feel the need to perform the due diligence necessary to satisfy the innocent landowner defense (a.k.a. innocent purchaser status). An innocent landowner defense is important for defending liability for the borrower/investor—but the more important issue is the potential health impact that exists when humans are unknowingly exposed to toxic chemicals because an environmental assessment was not considered necessary due to the financial concerns of a competitive market place!
Among the tools on the environmental/real estate/mortgage workbench are:
- the Florida Petroleum Cleanup Program
- environmental insurance
- the Florida Dry Cleaning Solvent Contamination Cleanup Program
- the Brownfields Redevelopment Act of 1997
- the Asset Conservation Act of 1996
- precedent-setting third-party liability lawsuits
- innovative remediation technologies
- pay-for-performance contracting
- creative remedial strategies
Central Issue: balancing economic development & environmental protection
This has always been the issue surrounding environmental concerns. It costs money to properly dispose of waste. It costs money to properly manage environmental risks. In a competitive society that is prone to occasional economic recession, the pressure to cut corners and costs can be strong enough to prevent appropriate environmental risk-management strategies.
There must be a balance. While painting the cautious environmental picture described above, the reader might get an impression that these are my dominant attitudes, but I am a believer in cost efficiency and a reasonable approach to investigating environmental risk. Most properties and most transactions can be managed using a phased approach, screening techniques, and appropriate research focusing on potential environmental concerns for the subject property. For example, extensive regulatory research for an agricultural parcel located five miles from any other developed property is a waste of time and money, in my opinion. Extensive historical research on a property that has clearly been undeveloped forever is a waste of time and money. As stated above, each property and each transaction is different, and a risk management strategy should be developed to focus on the specific potential risks that may exist at each site.
There are other risk-management considerations that do not involve health impacts, that are purely economic decisions. Like fixing up an old house for resale, “buy/cleanup/sell” opportunities exist throughout Florida. There are many property owners with expensive liabilities (some with no idea of worst-case scenario costs), for whom selling the property and the liability may be their only economical option. They may not have the cash to comply, so they must sell or face FDEP enforcement. There are numerous investment groups ready to relieve them of liability.
Some general strategies for managing environmental risks (in alpha order):
- bioremediation
- brownfield designation
- compliance auditing
- conditional no further action
- creative financing
- environmental insurance
- impaired property tax reduction
- indemnification
- innocent purchaser status
- land farming
- minimize third-party liability
- monitoring of natural attenuation
- pollution prevention
- pay-for-performance contracting
- pre-approved advanced cleanup
- risk-based corrective action
- sampling/site characterization
- sell “as-is”
- seller funded assessments
- tank closure
Strategize, plan, communicate and win. Maximize the benefit, minimize the impact.
The environmental issue is not new to commercial real estate, but the strategies to manage the risks have evolved over the last decade, allowing transactions that previously faded away to now remain vibrant until closing.