ABSTRACT
A sad fact of modern industrial society is that it is not unusual for real estate to become contaminated by hazardous materials. While one could anticipate discovering historic contamination at a brownfield 1 site, verdant green fields may also suffer ongoing soil or water contamination from underground storage tanks or other latent forms of pollution. Buildings and other structures can also contain hidden environmental hazards. For example, it is not uncommon for older office, retail, and multifamily properties to contain asbestos insulation, lead-based paint, and building equipment and materials that contain PCBs. Air quality is a related issue. Mold spores and radon gas may be found in any building, without regard to age or setting. Environmental hazards pose risks not only to human health, but to the financial well-being of a property investment as well. Environmental contamination diminishes property value, impairs investment quality, and may create legal liability for remediation costs, civil fines, and criminal penalties. For property owners, environmental hazards raise the risk that premises liability lawsuits will be filed by building occupants and workers who have been injured through exposure to pollution. Investors and lenders alike must weigh the “potential adverse effects of environmental contamination on the value of real property and the potential for liability under various environmental laws” (Greene, 2006, citing FDIC Financial Institution Letter FIL-14-93). These risks are compounded by the fact that environmental contamination is not always obvious. A study comparing environmental risk perceptions of real estate investors with those of lenders found that lenders perceived greater risk than investors arising from contaminated properties before, during, and after site clean-up. The study further found that “strong general market conditions tend to mitigate perceived environmental risk, while weak conditions exacerbate these risks” (Jackson, 2005, p. 130). Equity investors with prior environmental remediation experience and greater knowledge of and about contaminated properties perceived less risk overall.
