Commercial Business Basics: Environmental Know-How

A little insight can increase your marketability and decrease your risk.

June 1, 1999

In years past, commercial sites often sat idle because the cost of environmental cleanup and potential liability exceeded the value of a property. But recent regulatory changes and improved remediation techniques have allowed previously untouchable properties to become attractive to buyers.

Real estate practitioners aren’t required to be environmental experts. Still, familiarity with environmental issues could help you facilitate a sale, limit liability for the parties, and establish a reputation for thoroughness and dependability.

Even a vigilant practitioner can have a deal go sour. In one recent case, a group of buyers purchased an old factory for an apartment conversion. There was a title search and a state environmental inspection, and the seller disclosed an underground heating oil tank and soil containing petroleum hydrocarbons--typical of that type of property--and identified previous owners back to 1955. The sale went through, and the conversion began.

In most units, owners refinished the original flooring or installed carpeting. But in the last apartment to be converted, a contractor removing floorboards discovered mercury droplets. Tests found mercury deposits throughout the building.

After a year of testing, the health department ordered residents to vacate the building, which was then listed as a U.S. EPA Superfund site. Residents had to undergo extensive testing to determine whether they’d been poisoned by mercury, a potentially lethal contaminant.

Research revealed that before 1955 the building had been owned by an electric company that produced mercury-vapor lamps and switches. The buyers sued the previous owner.

In another case, a partnership bought a shopping arcade located on a site that had been occupied by a dry cleaner. Several years after the sale, the state of New York sued the new owners for contribution to the cost of cleaning up various pollutants the dry cleaner had released into nearby groundwater.

In each of these cases, if there had been indications of the properties’ prior use and resulting contamination, the real estate practitioners involved might have alerted the buyers to the potential risks and recommended that they hire experts to examine the properties. That wouldn’t have eliminated the problems, but it might have minimized the damage to the buyers and sellers, formed the basis for defending future litigation, and earned the appreciation of the clients and customers.

Risks to home and land

Commercial sites are more likely than residential to have environmental problems, especially the complicated, expensive-to-correct kind. But commercial sites are also likely to involve environmental experts from the outset. So if you also sell residential property or land, you may find the buyers and sellers leaning on you for guidance more than commercial buyers and sellers would.

In one residential case, a couple put their suburban home up for sale so that they could build a new house in the country. They found a rural property and within a week had a buyer for their home. They were ready to sign a contract when they discovered that the rural property was situated on wetlands so extensive that it would take up to two years to get approval to build. The couple took their house off the market, the potential buyer lost the home, and the salesperson lost the commission.

Could this situation have been avoided? To some degree, yes. Had the listing agent for the rural property been familiar with the area’s wetlands potential, she might have alerted the seller and suggested that the buildable areas of the property be identified before the potential buyers put their house on the market.

How could the practitioner have known about the wetlands? The U.S. Fish and Wildlife Service publishes wetlands maps, which provide the approximate delineations of wetlands areas throughout the country. Although the maps don’t identify areas smaller than 5 acres and aren’t fail-safe, they’re useful if you’re in an at-risk area.

Disclosure do’s and don’ts

Disclosing potential environmental problems is an important part of limiting liability for yourself and your clients. A few states have property condition disclosure requirements for nonresidential properties, and about 30 states have disclosure requirements for homesellers.

The disclosure statutes vary, but they generally require sellers, through their salesperson, to give information about the condition of the property before a sale. In most states, sellers are obligated to reveal only what they know, and some states even allow sellers to “disclaim” any knowledge.

Regardless of your state law, you should disclose any adverse environmental conditions you have reason to suspect may be present. Here are some tips to help ensure smooth transactions and avoid liability:

  • Make sure you and your clients understand your state disclosure laws and the risks associated with nondisclosure.
  • Alert your clients and customers to potential problems that you’re aware of or that you have some basis to suspect may be present.
  • If a seller refuses to disclose a problem or won’t permit you to do so, consider rejecting or terminating the listing.
  • Ask seller clients about potential problems such as contamination, radon, wetlands, floodplains, asbestos, and lead-based paint. (Remind home and apartment building owners of the federal law requiring them to disclose potential lead-based paint hazards to prospective buyers and tenants of pre-1978 structures.)
  • Ask buyer clients about their environmental needs, such as tolerance for noise or the desire to expand.
  • Find resources, such as Web sites and environmental consultants, to make available to your clients when they seek expert advice.
  • Don’t try to know everything and don’t let your clients assume you do. Be familiar with your area or specialty, but make sure buyers know when they should consult an expert.

Armed with a general understanding of environmental issues, you'll be better prepared to serve your clients and protect yourself. Raising issues that may deter someone from a sale may seem unwise, but eliminating future liability and increasing the potential for referrals should more than make up for the short-term loss.

FEDERAL RESOURCES

The U.S. government puts out a wealth of environmental information that can help you become familiar with conditions in your area.

For information on asbestos, brownfields, electromagnetic fields, hazardous waste, lead-based paint, radon, Superfund sites, drinking water, or underground storage tanks, contact the U.S. Environmental Protection Agency, 202/260-4700, www.epa.gov. Other resources:

Earthquake information
U.S. Geological Survey
National Earthquake
Information Center
303/273-8500
http://earthquake.usgs.gov

Flood hazard maps
Federal Emergency
Management Agency
800/358-9616
www.fema.gov/msc/

Topographic maps
U.S. Geological Survey
888/275-8747
http://www.usgs.gov/pubprod/maps.html

Wetlands maps
U.S. Fish and Wildlife
Service
800/872-6277
http://www.fws.gov/wetlands/

Finding an expert

Visit the Commercial Investment Real Estate Institute online at www.ccim.com for guidance on hiring an environmental consultant. At the site, click on CIRE Magazine and on Search Article Index, then type “environmental consultant” under Article Title. CIREI is an affiliate of NAR.

Although there’s no comprehensive national resource of environmental consultants, most states have some sort of certification, particularly for asbestos removal, radon remediation, and hazardous materials remediation. Check with your state EPA office for local requirements, then search the Internet or Yellow Pages under “environmental consultant.”

One source for environmental experts is The Counselors of Real Estate, an NAR affiliate. Contact the counselors at 312/329-8427; or search the CRE membership database at www.cre.org.

Sara Geimer is the manager of REALTOR® Magazine's Good Neighbor Awards and a former senior editor with the magazine.

Barry Chalofsky is a planning consultant and coauthor of The Real Estate Guide to the Environment ($29.95), which focuses on hazards to residential property. Chalofsky can be reach at profed@erols.com.

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