This article originally appeared in the Colorado Real Estate Journal, Oct. 3, 2001

Environmental Issues in Redevelopment By John R. Jacus, Esq.*

The redevelopment of industrial, commercial and residential properties is always a timely issue for the real estate industry, but never more so than now. Even with the slowed market of late, redevelopment is an increasingly attractive alternative that can revitalize neighborhoods, return idle property to profitability, reduce urban sprawl and save the cost of infrastructure development when compared to raw land. Redevelopment also raises a host of environmental issues which need to be handled in an organized and efficient manner, and in full compliance with applicable laws and regulations. While not comprehensive in scope, this article is a review of some key environmental issues likely to be confronted in the course of redeveloping a building or an entire area.

Whether a proposed redevelopment project will involve the refurbishing of older buildings or will remove existing structures entirely, the key to properly managing environmental issues and compliance is the gathering of baseline information on the property in question. This process of environmental due diligence will require significantly more detailed information than a simple “Phase I” environmental assessment, which by definition does not include the sampling and analysis of building materials. (See the American Society of Testing & Materials’ (ASTM) Standard Practice E 1527-00, for example.) The construction and prior use of older buildings will significantly heighten one’s level of inquiry, and almost certainly will

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require the sampling of building materials to evaluate the presence of asbestos, lead-based paint and a host of other hazardous substances. In the case of prior industrial use of a property, still other environmental concerns may be raised and will require investigation. The proper scoping and conduct of environmental due diligence should identify all such issues of potential concern and thereby minimize out-of-scope costs and time delays associated with the redevelopment of older buildings.

Because redevelopment will often involve some remodeling and reuse of existing, older buildings, a Phase I environmental assessment is inadequate. A form of Phase II assessment, such as the ASTM Standard Guide E 1903-97 for Phase II environmental assessments, should be conducted, but with specific modifications to include contaminants likely to be present. Steps calculated to develop additional information concerning the properties and their environmental condition include a record review for the property in question going back approximately 60 years, site reconnaissance, interviews of persons familiar with the property and adjoining properties, selective sampling and analysis of various building materials and environmental media, and a final report. Components of such an assessment to specifically consider including in one’s due diligence for property redevelopment are surveys of asbestos containing materials and lead-based paint, an evaluation of drinking water systems for lead or other contaminants, an evaluation of prior water damage and evidence of associated mold infestations or other biohazards, especially in ventilation systems; the presence of urea formaldehyde foam insulation or other sources of formaldehyde in building materials; radon gas entering through foundations, PCB-containing electrical equipment present or previously located at the property, and any hazardous materials handled at the property such as petroleum products, paints, solvents, 2

fertilizers, pesticides, etc., with special concern for areas devoted to their handling such as loading docks, waste handling areas and all manner of tanks or drum storage areas. This list is not exhaustive, but qualified and experienced environmental consultants will be able to identify most of these trouble spots, including specific issues identified as a result of their records review concerning prior facility use. General guides regarding these types of issues are also available from publishers of environmental and safety literature.

Failure to properly conduct one’s environmental due diligence in the redevelopment of older commercial and industrial properties can expose owners, operators and even contractors to significant liability. A notable incidence of this occurred in New York city several years ago and concerned an industrial building that had been converted to residential lofts. The residents were becoming ill in alarming numbers until health officials determined they had elevated bloodmercury levels. It turns out the building had been the home of a mercury thermometer manufacturing facility, and significant amounts of mercury had remained beneath the floorboards after building renovation and occupancy for use as lofts. Needless to say, attention to this prior site use at the outset would have avoided the expense, delay and personal injury ultimately arising from that redevelopment project.

Just as important as identifying specific issues of environmental concern associated with a redevelopment project is the task of structuring one’s project and related transaction to manage such risks. These kinds of projects can often involve properties that have been through foreclosure and are no longer owned by those knowledgeable about prior use and operations. Such owners may be unwilling to indemnify a buyer for preexisting environmental conditions, 3

making one’s due diligence even more important. In these situations, heightened inquiry in the due diligence phase is only one component of environmental risk management.

Of course, the best method of managing environmental risks associated with redevelopment is to not become an owner or operator of a property with significant potential liabilities. This requires pre-acquisition due diligence under a license to enter from the existing owner and directed by an experienced contractor. Care should be taken to properly dispose of any waste materials generated during an evaluation of the property at an offsite location.

Assuming no major pitfalls are identified and redevelopment is to go forward, there are a number of ways that the remaining risks of an environmental nature may be managed. In addition to seller indemnification, if available and reliable, are (1) escrow or reserve accounts to hold back funds for use in addressing possible environmental problems, (2) professional liability insurance of the environmental contractors involved, (3) resort to public funds for particular kinds of expenses such as underground storage tank (UST) program trust funds available for tank removal, and (4) acquiring environmental impairment liability insurance for the project, which can cover remediation cost overruns and liability for unknown conditions discovered on the insured property, among other things.

Finally, there are a number of financial incentives available from government agencies for certain so-called “Brownfields” redevelopment projects which may further enhance the financial viability of certain projects. Information on U.S. EPA incentives for Brownfields projects is available via that agency’s website (www.epa.gov). 4

__________ *John R. Jacus is a partner in the Environmental Practice Group of Davis Graham & Stubbs LLP, Denver, Colorado. He may be contacted via the firm web site, www.dgslaw.com.

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