In the course of acquiring, selling, managing, developing, or redeveloping property, today’s real estate firms and Real Estate Investment Trusts (REITs) face a varied, often complicated range of risks. Environmental liability risks can be one of the costliest, making identification and mitigation of these risks critical to protecting the bottom line.
Crafting contractual language to address concerns may address some environmental exposure, but it seldom encompasses them all. Environmental insurance programs can be designed and implemented to provide the comprehensive protection that backstops contractual language, covering those areas where contractual wording may not go far enough.
Lenders are very stringent in assessing environmental risk. That assessment could be the deciding factor in funding a transaction. Investment funds and private equity investors are attuned to the effects environmental risks could have on asset valuation, as well as putting directors and officers at risk.
Environmental risks have both bottom-line and reputational risks. Use of faulty, imported Chinese drywall to make up for a domestic shortage in Florida, for instance, led to thousands of homes with materials that were a source of sulfur-smelling chemical emissions that corroded electrical wiring, copper piping, and other metal components in addition to possibly causing health problems.
High-profile environmental exposures like this and other, more common ones – such as underground storage tanks, refrigerants, mishandling of maintenance detergents, legionella, mold, and indoor air quality issues – are both potentially expensive to remediate and can affect public perception in costly ways. Negative press about unaddressed environmental problems creates awareness among tenants, condo owners, condo associations, and community groups.
And as the government boosts funding, environmental regulation enforcement becomes more aggressive, opening more cost and reputational risks.
For Real Estate firms and REITs involved in acquisitions, divestitures, or development, then, getting the due diligence right is critical in each situation, including:
Acquisition and Disposition of an Asset
- Environmental Due Diligence – Balancing the cost of a broad, detailed investigation against the mitigation return on investment requires expert insight
- Remediation efforts that run into complications can push costs past original estimates
- Legacy and future third-party claims arising out of contractually assumed indemnity obligations. Indemnification agreements often have exclusionary language, time element limitations, monetary caps, ambiguous wording, and gaps that can lead to unanticipated costs. Failure to meet agreement obligations can also create counter-party credit risk.
Owning, Leasing, or Managing Real Estate
- Third parties affected by migrating contaminants from real estate assets such as former gas stations, dry cleaning establishments, management companies, or asbestos/lead abatement contractors
- Residual contamination from minor spills of maintenance products, oils, fuels, and lubricants affecting soil and/or groundwater which, over time, may adversely affect a property
- Indoor air quality exposures affecting third parties
- Purchase and Sales or Lease Agreements may be ambiguous or do not address environmental risks associated with a responsible party
- Pollution conditions encroaching onto properties from adjacent sites causing diminution in value, natural resource damage, and business interruption.
- Environmental regulator Fines or penalties for not meeting reporting requirements
- Environmental liabilities associated with the removal or disposal of materials offsite.
- Releases from underground or aboveground storage tanks.
- Natural Resources Damage (NRD) Restoration of land, wildlife, air, water, fish biota, and other such resources that result in a pollution condition
- New and emerging contaminants such as PFAS
