To accurately determine the extent of environmental impact on a property, it’s important to understand both current and historical tenant operations.
Environmental Risk Factors, by Asset Type
Multifamily: Often, the environmental hazards that affect apartment communities are caused by contamination from neighboring areas, such as air-quality issues created by nearby manufacturing facilities. These risks tend to be more pronounced in legacy buildings.
Office: Especially in older office buildings, emergency power generators may be kept in underground storage tanks to conserve space and prevent fires. But when these tanks leak, the risk of contamination magnifies, necessitating thorough environmental due diligence.
Retail: The growing trend among retail investors of repurposing former big-box stores for recreational uses—calls for heightened attention to environmental due diligence. And dry cleaning shops continue to create long-term problems, thanks to the chlorinated solvents used in operations. Slow to degrade, these substances can easily migrate through concrete and soil, contaminating groundwater.
Similarly, an environmental site assessment of a space previously occupied by an car repair business can uncover such issues as the presence of underground storage tanks containing petroleum products.
In both of these cases, further investigation is required, increasing time and cost for investors.
Industrial: Facilities that process metals or chemicals, including those that manufacture semiconductors or other electrical components, face amplified environmental risks. Tenants of these properties often store the substances that factor into their operations in underground storage tanks, which can degrade or pill and disperse toxic chemicals.
Property Condition Assessment
From the lender’s perspective, properly pricing the loan requires determining whether the borrower has adequately sized their potential investment’s replacement reserve. The property condition assessment needs to take into consideration the extent to which immediate repairs will be required, the expected useful life of systems and cost estimates for property improvements.