Environmental Liabilities and Solutions for Real Estate Owners

A new and significant source of liability now impacts the way property owners and managers conduct business — environmental liability. To ensure proactive management of all their business risks, property owners and managers must ask three questions: (1) What environmental liability risks do my properties pose? (2) Can these environmental liability risks affect my bottom line? (3) What can I do about these risks?

Environmental Liability Posed By Real Estate Properties

By its very nature, real estate is unique. While each property should be individually evaluated, it is possible to get a general idea of environmental problems that may exist within an investment portfolio based on common property uses. When considering environmental issues, it is essential to look at current property uses, as well as past and future uses. Issues to consider include:

Past Property Uses: Location is everything! The value of a property depends to a great extent on its location. Unfortunately, some locations which are attractive for a particular use today were attractive years ago for a much different use. For instance, a tract of land used for years as a remote oil well field may be amidst suburban developments now. Today this land may give a better return if oil production was ceased for residential and retail development. It is important for the developer and subsequent owners of this land to know its former oil well use. After the well pumps have been removed, the former property use will not be readily apparent. Questions may exist on historical issues such as:

  • Were the wells correctly abandoned?
  • Was oil-stained soil removed or treated?
  • Are there any surviving oil or methane gas seeps?

Answers to these questions will determine what risks the land presents. Due diligence prior to the purchase of properties is essential in today’s market to assess the latent environmental issues presented by a property’s history.

Present Property Uses: Most property investors invest in properties with low present use environmental exposure such as office buildings, retail establishments and recreational areas. However benign the use may seem, the potential for environmental exposures still exists. In fact, there are an increasing number of claims by tenants and patrons for incidents such as:

  • faulty heating, ventilation, and air conditioning systems;
    poor indoor air quality;
  • the potential for injury from lead paint or asbestos-containing
  • material;
  • fuel spills;
  • pollutant seepage from the foundation; and
  • pollution caused by hostile fire.

Future Property Uses: Environmental liability is more likely when incompatible properties come into contact. For example, a chemical plant is less likely to have complaints from its heavy industrial neighbors than it would from an adjacent residential community. The same rule applies when a property is converted from one use to another. When a property investor divests of a warehouse property, former operations issues are less likely to haunt them in the future if the successor continues warehousing operations. However, if the property is converted to luxury condominiums, it is more likely that environmental problems “passed on” to the successor could be offensive enough to the next tenants to pose future legal problems for the former owner.

Environmental Liability Risks Can Affect Your Company’s Bottom Line

The primary environmental loss exposures facing property owners and managers are:

  • Legal liability for bodily injury and property damage for pollution at a property;
  • Cleanup costs for pollution at a property;
  • Legal costs for defense of liability claims and government investigations;
  • Business interruption loss caused by a pollutant release and cleanup;
  • “Soft” costs incurred during a delay in property development caused by pollution; and
  • Property value diminution caused by the presence of environmental contaminants.

In the case of environmental liability, the number of incidents affecting companies is relatively low in relation to other business liabilities. However infrequent, when environmental losses occur they are both significant in amount and duration. Environmental cleanups can range from $20,000 to remove a leaking underground storage tank to several million dollars to remediate hazardous waste-containing fill and treat contaminated subsurface waters. Environmental losses, even when precipitated by a sudden occurrence, are not resolved quickly. It may take months to procure the necessary regulatory approvals to initiate and finalize a voluntary cleanup as in the case of an underground storage tank. An environmental toxic tort class action, however, may take years and great amounts of precious business resources to resolve.

In addition to monetary loss for liability claims or cleanup costs, environmental incidents pose other impediments to business operations such as:

  • Financing: Lender/investor reluctance to accept at-risk property for security
  • Property Transfer: Discovery of pollution devalues property, hinders development
  • Mergers/Acquisitions: Environmental matters may stall negotiations

What Can Property Owners DO About Risks?

There are four typical methods for dealing with environmental risk. Though helpful, the following three methods do present problems:

  • Abate the risk: identify and remove known contamination while employing steps to prevent future pollution events.
  • Assume the risk: A property owner must be certain of the magnitude of the risk it assumes. Too often an “incidental” risk becomes greater than anticipated. For example, the removal of an old underground tank was expected to cost $20,000. Due to widespread contamination, the actual cost is $200,000.
  • Contractually transfer the risk: Shift liability in a Lease, Sale or Property Management Agreement. However, contractual risk transfer is inherently problematic. The parties may later dispute that a particular loss was transferred, or one party may be unwilling or unable to perform its obligations.
  • Insure the risk: There are specialty coverages available in the environmental insurance marketplace that address the unique environmental liabilities faced by property owners, managers and their creditors. Insurance designed specifically to cover environmental liability alleviates the uncertainties of contracts, the potential for misinterpretation and the financial insecurity associated with warranty or indemnity. In today’s environmental insurance market, insurance products are available for any stage in property use — acquisition, development or renovation, and post-development use. The market even provides insurance for known conditions from which liabilities may arise.     www.xlenvironmental.com/library/comreal.htm