Environmental factors in play
Developers are taking a closer look at properties for contamination and remediation.
The positive economic climate and low interest rates are causing properties to change hands and be developed at a fast rate, and local environmental consultants are riding the coattails of that activity.
Joe Berlin, president of BLDI Environmental Engineering, has fielded several offers on the company’s downtown building in the past several months, but he’s not ready to move.
“We love being downtown, but if someone offers me $10 million, I’d think about it,” joked Berlin, in reference to the flurry of activity going on in the real estate market.
With the upswing in real estate transactions, Berlin said it’s more important than ever to start thinking about environmental impact early in the process. Fortunately, he said, more buyers today are environmentally conscious.
“With people under 40, it’s certainly true, regardless of political persuasion,” Berlin said. “It’s what we have to do. People look at something, and if there’s a risk of something coming back to them, they are very conscious of that.”
PM Environmental senior consultant Shawn Shadley echoed Berlin’s statements. Shadley said developers are much more aware of the money available for building or renovating environmentally sound structures, and those factors also come into play with lenders who are driving the environmental assessments of properties.
“Lenders are wiser. They need to look (at what will happen) if they foreclose on a property,” Shadley said. “One of the reasons more people are looking at these factors is they understand how big of a liability it can be.”
For those reasons, Berlin said it’s important for all the players in a transaction to get attorneys involved early in the process and to be as transparent as possible. He said about 20 percent to 30 percent of transactions in West Michigan have some kind of environmental issue. Many deals are done on tight timeframes and running into an issue later in the process can prove to be a major hindrance.
Berlin said BLDI promises to turn around Phase I environmental assessments within 10 days or it’s free, to help speed up the process.
“In some cases, it might not be a big issue, so if you’re a seller, pull all of that information together and disclose it all,” Berlin said. “Transparency mitigates concerns.”
Berlin said BLDI used to have a cap for how long it kept records, but now retains all records from past reports because it’s not uncommon for a client or property to want a report from 15 years ago.
If someone purchased a building five or more years ago, the environmental concerns then, compared to now, could be different.
“What may have been an issue five or 10 years ago may not be an issue anymore — or vice versa,” Berlin said.
A recent concern for today’s environmental consultants is vapor intrusion, which could involve former gas stations or dry cleaners. Properties that were viewed as clean might not be as clean as previously thought if certain chemicals are present as vapors, and it is of particular importance when transforming industrial sites to residential.
The vapors from the chemicals can make their way into developments and cause adverse affects on indoor ventilation, Shadley said.
“A lot of firms are taking a closer look at vapors than even five years ago,” he said.
For new builds, an easy solution is a layer on the foundation slab that is impermeable to vapors. For rehabilitation projects, there are simple ventilation processes that will flow the vapors away from the interior of the building, much like a radon-mitigation system.
“It’s not a deal killer,” Berlin said. “If you’re doing an industrial property rehab, don’t be surprised if it comes up.”
One of the major sticking points in Michigan for environmental cleanups has been the absence of an underground storage tank financial assurance fund, according to the U.S. Environmental Protection Agency. Michigan was one of just a few states without such a fund, until Gov. Rick Snyder signed into law a new Underground Storage Tank Authority Board that allocates $20 million annually to help clean up leaking underground storage tanks.
Michigan has approximately 8,500 leaking underground storage tanks, according to the EPA.
Berlin said lenders are wary of the fund; a fund that ceased in 1995 spent more than $650 million in five years. Still, Berlin said the fund will provide relief for smaller companies that struggle to pay for insurance as their tanks age.
The Michigan Department of Environmental Quality also has streamlined its process, Berlin said.
“They’re more customer friendly,” Berlin said. “I think Grand Rapids has always been that way, but the director wants it that way across the state. They’re responsive, and when we’re trying to get things turned around, they can turn it around in just a couple of days.”
One process currently lacking in the state is a comprehensive online records system that developers can access, Berlin said. He said Michigan is one of a few states without an online system, which can be a real time-saver for developers. He said he can work at his desk and pull up an address in Indiana and have all files associated with that address pop up on his computer.
Without detailed reports, lenders might allocate a smaller loan value with higher interest rates.
“A lender wants to look at a detailed report so he can understand the risk better and might give it a lower risk factor and get a higher loan value with lower interest,” Berlin said.
Most environmental issues are from legacy sites, Berlin said. Prior to the 1980s, record keeping for properties was scarce. Many underground storage tanks were removed prior to the federal regulation in 1989.
Berlin used the example of an approximately 90-acre, family-owned orchard that was under consideration for residential development. The site registered 20 times the amount of allowable arsenic because the farmers had sprayed massive amounts of pesticides. Berlin said the family lost what they had thought was a multi-million dollar deal. It was eventually turned into recreational deer-hunting property.
Shadley said an increasing portion of PM Environmental’s business is property condition assessments. He said the assessments are largely requested by lenders to help better understand the purchase.
Shadley said the condition assessments look at a property about seven to 12 years in the future to determine when a roof, parking lot, or other structural pieces might need replacing. The assessments are useful for anything from a storage building to a large office building, and Shadley said the firm recently has done major work in Detroit, such as the Fisher Building.
“We take a look at a building and its useful life and anything that might need fixing,” he said. “It might be a $2 million building, but there could be a need for an additional $750,000 of improvements in the next 12 years. You have to consider a lot in your purchase.”
The assessment is further proof that the world is becoming more conscious of how the environment affects everyday life.
With savvier buyers, sellers and developers, Berlin was adamant attorneys must be involved from the get-go.
“People want to save that $500,” he said. “But an attorney can save you a lot more than that.”