Spencer Macalaster, Risk Strategies Co.

There are many aspects of risk that real estate firms face today in the course of acquiring, selling, managing, developing or redeveloping property. It is critical for a real estate owner to identify environmental risks. Real estate firms spend a significant amount of money to mitigate risk by crafting contractual language to address their concerns. This may address some of the exposure but not all. The use of environmental insurance programs can be designed and implemented to provide protection to backstop contractual language as well as providing coverage for those areas where contractual wording may not go far enough. There is mounting pressure from lenders today regarding environmental exposure.  Their assessment of environmental risk is much more stringent and could be the difference in whether the lender makes funds available in a transaction. In addition to lenders, other investment funds and private equity investors are also concerned about the impacts of environmental risks that could affect the valuation of the asset and put the Directors and Officers at risk. Negative press in the media has created awareness with tenants, condo owners, condo associations and community groups that want to ensure an environmentally friendly property. Environmental enforcement has become more aggressive with additional funding from the government.

Most recently, real estate firms have faced high profile environmental exposures such as legionella, mold and indoor air quality issues brought about through awareness in the media. PCB’s in caulking, asbestos, lead, Chinese Drywall, aboveground storage tanks, underground storage tanks, refrigerants and mishandling of maintenance detergents are other areas that have impacted the real estate industry recently. For example, one of the larger events that have affected real estate firms recently was during the construction boom between 2004 and 2007. Chinese drywall was brought into the United States due to a lack of gypsum material. This shortage was brought on by the Florida hurricanes in 2004 and 2005. The amount of drywall brought in during that period was enough to build 60,000 average sized homes. These materials contained chemicals that emitted a smell like sulfur and corroded electrical wiring, copper piping and other metal components that could cause health problems.

Risk considerations when performing environmental due diligence on acquisitions, divestitures or developing: • Environmental Due Diligence – Economics drive the process. Money spent on the scope of  investigation to identify potential areas  of risk versus diminishing return on the investment; • Third parties affected by contaminants migrating from real estate assets, such as former gas stations, dry cleaning establishments, management companies, or asbestos/lead abatement contractors; • Purchase and Sales or Lease Agreements that may be ambiguous or do not address environmental risks associated with a responsible party; • Pollution conditions emanating onto properties from adjacent sites causing diminution in value, natural resource damage and business interruption.

Many real estate firms have development/re-development subsidiaries within their organization while others hire third party contractors. In both scenarios, an environmental review should be performed around how the risks should be addressed. A few areas to consider: • Contractors, subcontractors and third tier subcontractors conducting construction activities that are inadequately insured for environmental risks associated with the project.  Many construction projects have incurred fines and penalties from environmental enforcement agencies associated with site run off, mishandling of contaminated materials, contaminated materials brought on site and unpermitted activities that can adversely affect a project; • Unexpected Business Interruption Costs; • Wastes streams from construction projects sent to third-party non-owned disposal sites that the real estate developer or re-developer may have responsibility to remediate.

Spencer Macalaster is executive V.P. and real estate practice leader with Risk Strategies Company, Boston.