Environmental Trends in Real Estate

Whether an office building, an airport hanger, or farm land, most buyers of real property do not want to tackle environmental issues, primarily due to cost, risk and liability factors. Issues could include, asbestos, lead-based paint, underground storage tanks, and wetlands.

Costs
In the year 2005 and beyond, real estate sellers and purchasers will see reduced costs for environmental clean-up. Step back into the late 1980’s, during the so-called “Asbestos-Awareness Era” At this time the Environmental Protection Agency put into place a set of regulations intended to control asbestos exposure to children while they were at school. The Occupational Safety and Health Administration stated that exposure to working adults is also a health threat. Costs for asbestos removal skyrocketed, causing a lot of buildings to be abandoned. Since the 1980’s and earlier, environmental issues have increasingly become a negotiation tool in the purchase price of a building or property.

Risk and Liability
As lending institutions, sellers and buyers of real estate become more savvy with environmental risks. There are cases in which today, financial institutions are sometimes unwilling to risk factor environmental hazards into their holding portfolio as the primary fiduciary holders. Someone may pass on a property once they become aware of an environmental issue.

A procedure known as the Phase 1 Environmental Site Assessment Process E1527-00 provides standards to buyers and sellers with a strong emphasis on business environmental risk as a driving force for due diligence. This is in order to reflect the specific business needs and concerns of users. This standard helps to define what the risk may be on a particular site.

Driver
In many cases the financial industry is driving environmental issues on real estate deals. Most banks and lending institutions require an ESA on any type of commercial property transaction.

Environmental Insurance—To Have or Have Not
It could be an inexpensive way for the bank to be protected in the event the borrower cannot buy the debt in the event an environmental issue occurs. The lending institution does not pay for this insurance. The borrower incurs these costs. For example, the owner may be civilly sued for benzene exposure due to a leak in an underground fuel tank at the property that contaminates a neighbor’s drinking water over the last five years. The owner of the gas station may be forced to close shop and file for bankruptcy. At this point the insurance (should) kicks in and pays the bank. There is one very important note. The business owner receives nothing. They may have bought the property five years ago, but did not know the tanks were leaking. This type of insurance does not pay out to them. They pay only the bank and they still will lose their business. This is a similar concept to Private Mortgage Insurance (PMI) on home loans.

Another Recent Trend
Another recent trend is a survey called a Cultural Resource Survey. This type of study is deemed appropriate on historically significant sites where there may be American Indian remains present. It could be something as small as an Arrow Head, or as large as a Burial Ground. Typically an Archaeologist is called into this type of project if an issue is identified. In most cases, Real Estate Developers do these types of surveys, along with wetland delineations, before they even decide to purchase or develop the land.
Like the environment, real estate is changing every day. Lawhon & Associates, Inc. keeps up with tracking long term changes as well as every day events that can affect the disposition of real estate. For further information, please call us at (888) 452-9466.