Anyone involved in commercial real estate transactions these days is terrified of finding an environmental skeleton in the closet. Buyers of property and, above all, financial institutions fear inheriting someone else's legacy of contamination. Land owners must also be wary of selling polluted property and being held liable for cleanup costs and substantial penalties. All concerned are turning to environmental service companies for help.
Until the recent downturn in the economy slowed property transfers, there had been tremendous growth in demand for assessments that reveal hidden liabilities and the true market worth of real estate. Environmental auditing and land transfer assessment, as these services are often called, still represent a business opportunity for environmental consultants and have proved to be lucrative for several full-service environmental companies.
The assessment business got a significant boost from the landmark case United States vs. Maryland Bank & Trust Co. The bank had foreclosed on a farm that had been used to store hazardous waste, and in 1986 a federal district court found the bank, as the current owner, liable for cleanup that exceeded the cost of the property.
Lender liability for environmental cleanup has been the source of ongoing controversy ever since and has been challenged in a number of courts. Congress has also been pressured to enact legislation to protect financial institutions. Regardless of the outcome of new cases and passing of new laws, most lenders do not need to be convinced of the value of an accurate environmental assessment.
Full-service companies believe that they're the best positioned to handle profitable, multi-site assessments. According to Sherman Smith, general manager of ENSR Corporation's Irvine, Calif., office, large companies have "deep pockets" appeal for conservative buyers and sellers. "We have a reputation for doing very well on large, multi-site multi-state property transfers," Smith says.
Such jobs are prestigious but can be a headache and may entail assessing 12 to 150 sites at a shot. Profits from such jobs are hard-earned, given the tight deadlines that most property deals demand and the resources that must be mustered to bring large-scale jobs in on time, Smith says.
Land transfer services represent 5 percent of ENSR's business and 10 percent of its consulting and engineering sector, which totaled $70-80 million in fiscal 1988. That year, ENSR handled 1,000 land transfer projects, many of which were at multiple sites.
For ICF Kaiser Engineers Group Inc., demand for environmental liability risk assessments came first from insurance companies to give them an idea of what premiums should cost for pollution insurance. According to ICF Vice President Stephen Bailey, serving the insurance companies put transfer procedures in place.
At the "high" end of the market, ICF conducts environmental audits for large properties such as oil refineries or industrial sites. In dollar terms these dozen or so projects make up the bulk of ICF's annual auditing work, earning the company $50-200,000 per project, Bailey says. Sites like shopping malls, gas stations and underground storage tank cleanups are classed in the "mid range," with residential parcels at the lower end of property transfer services spectrum.
ICF does "hundreds" of jobs yearly in the mid to low ranges, at prices ranging from $3-6,000. ICF KEGI, a private company headquartered in Fairfax, Va., projects total revenues for fiscal 1990 in the $40 million range, of which environmental auditing and land transfer will be $4 million.
Versar Inc. (Springfield, Va.) offers services ranging from site investigation to cleanup or remediation. It has been in the environmental auditing and property assessment business for about 10 years. Today, the majority of Versar's clients are sellers, although the driving force is invariably the lender, with some 40 percent of property assessment services in the Washington area, for example, being purchased by the "mortgagors."
Like most other assessment companies, Versar's procedure occurs in three phases. Phase one is usually a "walk through," which satisfies 70 percent percent of clients. Phase two entails drilling and sampling. About 5 percent of Versar's clients proceed to the third stage, which characterizes the extent of the pollution and methods and cost of remediation.
Financial institutions are not limiting their interest in sites to property transfers, however. Some banks are running environmental risk profiles on all companies (and their property) applying for loans regardless of what the money is for.
As we learn more and more about the environmental costs of doing business, financial institutions are able to more accurately calculate the risk associated with their loans. Environmental businesses will be challenged to fill this increasing need to maintain the national objective of improving environmental quality without sacrificing economic growth.
Grant Ferrier is editor of the Environmental Business Journal, San Diego, Calif.