Environmental issues pose RE dilemmas

It is time for the real estate industry, as a whole, to take a proactive stand on environmental issues. And the issues are numerous. The industry is facing the dilemma of the production ban of CFCs, is stricken with Indoor Air Quality (IAQ) complaints and is involved in transactions that require some kind of environmental cleanup or litigation.

Companies now are turning their attention to environmental issues, says Brad May, national accounts sales manager for ATEC Associates Inc., which is based in Indianapolis. "Most of ATEC Associates' clients are far more sophisticated than they were only five years ago and have made giant strides in becoming more focused on the prevalent issues of the day."

In many cases, companies can look at past environmental problems to try to manage current environmental issues, says David Vance, president of New York-based KTR Environmental Services Inc. "The real estate community has recently begun to attempt to redevelop sites that are environmentally impaired," Vance says. "In the course of those activities, the real estate industry is becoming more aware of the environmental industry's capabilities and has begun to utilize risk management services in the process of redeveloping these properties."

IAQ: What's all the hot air?

According to the Environmental Protection Agency, poor air quality affects an estimated 25 million people and costs U.S. businesses over $65 billion annually in lost productivity, health-related care and employee sick days each year.

"People are relying on recirculated air within the building for their ventilation," notes Maurice Dubuc, vice president of sales and marketing for Warren Technology, based in Hialeah, Fla. Contaminants, such as pesticides, cleaning fluids, dust from toner cartridges and clothing, print room exhaust and smoke accumulate throughout the day.

"They stagnate and pool. As you get a higher concentration, the air becomes more harmful," says Dubuc.

"The key element that building owners must realize is that it's an issue that's not going to go away anytime soon," says Dubuc. "They really need to take proactive measures to implement strategies to maintain healthy and safe work environments for their tenants."

Gary Luepke, systems engineer for The Trane Company, based in La Crosse, Wisc., says, "Develop a program. Determine now what you're going to do if and when an IAQ complaint comes up.

"The first thing to do when you get a complaint is to document the specifics. Next ... walk through the problem area looking for obvious causes such as mold growth, pesticide use or other foreign material that occupants are bringing in the building. If nothing obvious is found, go one step further and start looking at the ventilation system to see if the building is being properly ventilated and if there is any misadjusted or malfunctioning HVAC equipment."

Howard J. McKew, vice president of engineering for William A. Berry & Son, based in Danvers, Mass., says that surveys indicate 75% of IAQ problems are directly related to the HVAC system. "Different groups will tell you that if you have an IAQ problem, the solution is either a five- or six-step process," he says. "The first three steps are directly related to the HVAC."

McKew advises that in the same way building owners sometimes hire sound consultants to ensure the sound level will be reasonable in a new building, owners should, before developing a building, have someone other than the design engineer review the drawings for potential IAQ issues. One benefit of having a third party review the plan is that the owner will have something in writing, and IAQ may be less of a liability issue in the long run.

ASHRAE's standard of care

The industry has sufficient standards for identifying IAQ problems, says Trane's Luepke. The standard of care in the design industry is ASHRAE 62-1989, he says. It's currently under revision with the first public draft expected in July and the final version expected sometime in 1996. Luepke says: "ASHRAE 62 uses the design occupancy for the building and what type of room it is. You can then go in and determine how much ventilation air or outdoor air should be brought into that space."

When building owners and operators and investors are considering a new building or renovating an existing building, they should ask their engineers if they are designing this new building/renovation to the current IAQ standards, namely ASHRAE 62.

Dubuc says building owners should make sure that:

* The building has adequate maintenance,

* a proportional amount of fresh air is entering the building,

* the air is adequately distributed and circulated, and

* the air is filtered and those filters are being changed regularly.

Five months and counting

In July 1992, the EPA issued its final rule implementing section 604 of the Clean Air Act Amendments of 1990. Section 604 limits the production and consumption of a set of chemicals, including chloroflurocarbons (CFCs), known to deplete the stratospheric ozone layer.

The federal government's ban on the production of CFCs goes into effect Jan. 1, 1996. Building owners must now find new ways to cool their buildings, retrofit their existing HVAC systems or bank existing CFCs to ensure they have enough to last for many years to come.

By now, companies should have assessed where they are, says Tom Edwards, marketing manager for existing building services at the Trane Company. "They should have an understanding of the machinery they have ... At that point, I think it's also worth trying to get an understanding of your current system requirements. That information is used to develop a plan for your equipment.

"If you see that some equipment is quite old, inefficient or has high maintenance costs, set up a plan to replace that equipment. It doesn't mean that you have to race out and do it, but figure out when you're going to do it," he says.

Larger companies equipped with an array of resources seem to be ready to face the production ban. Al Colon, vice president of the engineering group for Equitable Real Estate Investment Management Inc., New York, says that back in 1990, Equitable determined that it needed to address the potential impact of the CFC ban on the manufacture of certain refrigerants and to assess the potential impact the ban would have on its properties.

They determined that since the existing refrigerants could not be destroyed or released....Equitable calculated how long their major refrigerant, R-11, would be around. "We felt that R-11 was going to be available, and it didn't make sense to change it unless there was an economic reason to do so."

Colon says he would encourage real estate companies to "really do economic analysis of the condition of the chillers before they decide to replace them."

Newer chillers, for example, could be retrofitted to use less harmful refrigerants, such as HCFC-123. Retrofits are more applicable to relatively new pieces of equipment, says Trane's Edwards, such as chillers in the range of 15 years or less that were relatively efficient on the original CFC refrigerant. "Most of the ones that we have out there were R-11 based machines -- low pressure machines. Those are very readily modified for the new refrigerants," he says. Sometimes retrofitting can improve the efficiency over what it was originally, he adds.


If there was an over-reaction to asbestos in the '70s and '80s, there is now an "under-reaction" to the problem, according to Warren Hart, managing director for Polaris Management Co., based in Stamford, Conn. Asbestos is still a "live issue," and the penalties are still as great if not greater with the Occupational Safety and Health Administration (OSHA) and the Clean Air Act regulating environmental issues.

The most important thing for a company to do, according to Hart, is to determine what their situation is before they jump to react. "During the panic period, the idea was: 'I've got asbestos, I've got to get it out' -- sometimes making the problem worse." Properly managed asbestos is not the problem. Hart points out the importance of training employees on the proper way to handle asbestos and having a competent person to monitor it.

Hart says it is very important for companies to be aware of the new provisions and training requirements under revised OSHA regulations. They are now sending corporate officers to jail in some extreme cases, hart adds. It's an issue that should not be ignored.

Who gets the bill?

Environmental Site Assessment Insurance is becoming a primary source of environmental protection for lenders. One company offering this type of insurance is Environmental Warranty. "We built this product because we saw environmental issues becoming the single largest problem many people were coming down to, whether it was an investor or a developer or a lender, when analyzing a transaction," says Charlie Perry, president. Perry, a member of the environmental subcommittee of the Mortgage Bankers Association, says that he and some colleagues decided that it would be nice to design an insurance product that said environmental engineering is not an exact science. "These peopel are going to make mistakes. They're not going to find everything," he says.

Lawyers Title Environmental Insurance Service Agency, a subsidiary of Lawyers Title Corp. which is based in Richmond, Va., works with Environmental Warranty Inc. to provide site assessment insurance. Jeffrey D. Vaughan, president of the insurance service agency, explains that site assessment insurance is only given "upon receipt and review of a satisfactory Phase One site assessment." If some sort of hazardous material was discovered during Phase One assessment, then the insurance provided would not cover that substance, and in serious cases of contamination, the site may not be insured at all.

"The policy can protect either a lender or an owner. It provides insurance rather than the assurance provided by a Phase One site assessment," Vaughan says. "In many instances, it has replaced environmental indemnities given by sellers when conveying real property."

"If you have property casualty coverage and title coverage," Perry says, "you should have environmental insurance because unknown environmental contamination is one of the largest impacts present today in regards to commercial real estate transactions. You need to insure away that risk," he says.

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