Environmental Inspections: NEW FACTOR IN RISK MANAGEMENT, LENDING PROCESS

ERNEST 'JOE' SOLOMON

From redesigned hot tub drains to security cameras, it seems that many multifamily property owners have instituted elements of a risk management program. However, risk elements in the form of environmental hazards often are not apparent to the naked eye, leaving property owners vulnerable to health and safety lawsuits. According to the Environmental Assessment Association (EAA), the best way to protect your property is to perform an environmental inspection as part of your risk management program.

You may have encountered the inspection process when purchasing or refinancing property. The trend in lending is to require the buyer to pay for an environmental inspection before closing. This process helps to protect both the lender and the buyer against potential future lawsuits. When selling a property, it is best to be aware of and correct any environmental hazards ahead of time to avoid an inspection that yields negative findings, which can stall a sale.

It's important not only to protect your property and residents from future hazards but also from preexisting conditions - those that may have been unknown when you bought the property. An initial environmental inspection will go a long way toward satisfying the requirements of what's known as the 'innocent purchaser defense.'

In the past, the U.S. Environmental Protection Agency (EPA) forced owners to clean up any hazards on their properties, whether or not they caused them. The innocent purchaser defense now helps to limit the owner's liability for hazards caused by previous owners or surrounding property owners.

If you are about to sell a particular property, an independent inspection is also a valuable risk management tool. The inspection establishes 'seller due diligence,' a defense that can be used should subsequent owners sue you for hazards found at the property site after you sell.

WHAT TO EXPECT

As part of the lending process, some mortgagees require that an environmental professional or an underwriter trained by the American Society for Testing and Materials (ASTM) complete an initial inspection. Other lenders may accept ASTM's questionnaire, which is completed by the borrower or his designated inspector. If you would like to conduct the initial inspection, you may call for the Transaction Screen Questionnaire, which is the form specifically designed for use by any property owner who is not an environmental professional. The instructions provided with the questionnaire, published by the ASTM, will walk you through the initial inspection process.

For the complete standard and copies of the questionnaire, contact ASTM customer service at 215\299-5585.

An environmental professional will be required if, during the preliminary inspection, you encounter or suspect an environmental hazard. The next step is a Phase 1 inspection, which will cost between $1,800 and $2,000 in most areas of the country.

The EAA, an organization of more than 5,500 environmental professionals worldwide, offers a free referral service to connect you with an inspector. Call 602\483-8100.

The environmental inspection covers a wide scope of issues. The inspector will want to look at everything. It is in your best interest that he find any possible health and safety hazards to limit future liability. In addition to carefully examining the property, the inspector will review a wide range of government records to see if the property or any nearby property has been contaminated in the past. The owner, manager, and residents will be interviewed. The inspector may also speak with neighbors, past owners, building inspectors, assessors, or health inspectors - basically anyone who may know some of the history of the property. If a possible hazard is identified, the inspector will notify the owner and outline what tests must be run for verification.

COMMON HAZARDS

Common environmental problems crop up most often in older buildings, but even new construction sites can contain threats. Unless otherwise indicated below, state or federal law requires that most environmental hazards be controlled by a state-certified contractor.

Asbestos

A few years ago asbestos was one of the most dreaded environmental hazards in the industry because of the tremendous expense involved in abatement. Abatement was the course most often recommended when asbestos was found on a property. Owners, therefore, dreaded hearing the word, knowing that a messy and expensive procedure was just down the line.

Today, that's not necessarily the case. Recently, regulators have learned that removal often puts more asbestos into the air than ever existed by just leaving the asbestos alone. Today, the approach is to contain the asbestos unless it is in bad condition - what inspectors call 'friable' (i.e., crumbling).

One of the most frequent locations for asbestos in apartments is in a popcorn ceiling. Before 1978, ceilings were sprayed with a material that contains asbestos in excess of the EPA contamination threshold.

In living areas, there are two options for dealing with friable asbestos in poor condition: A contractor can either remove it under stringent environmental controls or encapsulate it. A ceiling, for example, can be contained by installing new drywall over the old ceiling. In other areas, if the asbestos is in very good condition, the environmental inspector will make a note of its existence and may recommend leaving it alone. In such a case, the owner must implement an Operations and Maintenance (O&M) plan to periodically inspect the areas of concern to determine if remedial work is required at a later date. Additionally, residents will be notified that they should avoid disturbing the areas of concern.

Lead Paint

Most multifamily housing owners and managers have already encountered the lead paint problem. Various owners have had to settle lawsuits and establish abatement programs when a resident child has been found to have high levels of lead in his blood. New notification regulations effective this year will make residents much more aware of the problem.

Paint does not have to be peeling to cause lead poisoning. The greatest concern is with chewable surfaces. Small children can easily get lead poisoning from chewing surfaces with perfectly intact lead-based paint, especially on window sills, door casings, and banisters. In addition, normal oxidation of such paint causes dust that contains high enough levels of lead to cause brain damage in a child or high blood pressure in an adult.

Buildings constructed or renovated between 1940 and 1980 are the most likely to contain lead-based paint. Many laboratories will analyze paint chip samples for a relatively small fee. The EAA can recommend a reliable laboratory if you call the number listed above or they can tell you where to find an inspector with a portable X-ray machine that is able to check for the existence of lead. Usually the most cost-effective way to deal with chew-able surfaces is to have a state-certified contractor remove them. Some surfaces with lead-based paint can be encapsulated using an EPA-approved paint. As a buyer, you certainly will want to know whether abatement has been completed for any property you are considering purchasing.

Owners should be extremely careful and make sure their properties are in compliance with new lead disclosure regulations.

Radon 

Radon is a radioactive, odorless, naturally occurring gas that can pose a significant lung cancer risk in apartment buildings, especially for smokers and small children. The lower floors are normally the only ones affected. Radon can appear in high levels in one building, but the building next door may not show any signs of the gas, depending on the underground rock formations that allow the gas to seep out.

Testing for radon and solving any problem are both relatively easy and inexpensive. Testing for the highest level of radon is done on the lowest living level of a building. Various sampling methods are available through specialized contractors.

If a building contains levels of radon above EPA's recommended limits, the problem often can be solved by sealing any cracks and crevices that allow the gas to leak in. If sealants do not correct the problem, a simple ventilation system can be developed by your air conditioning and heating specialist.

Underground Storage Tanks

Underground storage tanks can pose a serious risk not only to the property where they are buried but also to the surrounding properties. Seepage from these tanks may contaminate surrounding soil and ground water and may leach to adjacent properties. The resulting contaminated soil must be removed and disposed of using an EPA-approved procedure and replaced with clean fill dirt.

The best solution is to take the tank out of the ground before it begins to leak. Find any underground storage tanks on your property by looking for fill and vent pipes. These may be capped or open and may be very small short pipes sticking out of the ground. If the tanks are still in use, they must be replaced with specially designed double-walled tanks.

Tanks no longer in use may be hard to find, but the history of the property should yield clues. If the property ever held a gas station, an industrial manufacturing plant, or was part of a farm, there is a real possibility that it contains an underground storage tank. Check the history of your property to determine if it fits into any of these categories.

Soil and Ground Water Contamination

One of the greatest threats to soil and ground water is contamination from off-site sources. Inconvenient at best, the cleanup of soil and ground water contamination can be extremely costly. Although you may get your money back through the court system after cleanup has been completed, the cleanup of any contamination on your property due to seepage from outside sources might first come out of your pocket.

The Environmental Assessment Association can make this job much easier by providing a Site Assessment Report for $125. This report is a good source of information required to complete the ASTM Transaction Screen Questionnaire. The EAA's report contains a listing of all known environmental hazards within a one-mile radius of your property using data from a variety of state and federal sources. If you find that a hazard on an adjacent property may threaten to contaminate your property, report the situation to the agency with jurisdiction. If unsure of jurisdiction, call your state EPA office for direction.

Flood Plains

The proximity of multifamily housing to a flood plain is considered an environmental hazard for FHA-insured mortgages. Many older buildings were constructed before flood plains were defined in the 1960s and 1970s. FHA insurance requires the first floor to be constructed at a level of one foot above the 100-year flood plain. In addition, the mortgagor must be able to obtain flood insurance.

Check with your financing providers and insurance company to determine what course of action will be required on your property if it is on a flood plain.

On-Site Chemicals

The maintenance shop area in most apartment communities is a source of potentially hazardous chemicals, from lawn care chemicals to replacement ballasts for florescent lighting. These substances are necessary on apartment properties and are not necessarily a bad thing if they are stored and documented properly. If not, however, they can become an absolute nightmare for property owners and managers.

The Occupational Safety and Health Administration (OSHA) requires that Material Safety Data Sheets (MSDS) be available on site for review by employees who use such chemicals. An inspector will request that these sheets be provided and will compare them to the products he observes in use as well as to the storage arrangements for these chemicals.

The environmental topics discussed above are only a few of those that may require attention in an assessment. It is in the best interest of an apartment owner and/or manager to stay abreast of changing concerns in environmental topics. New materials frequently become available for use in residential applications. These materials may be attractive, but they also may harbor an environmental threat that takes time to surface.

If an environmental inspector finds these or any other environmental hazards which remain unresolved, he is required by professional ethics to alert the proper authorities for the situation. In the case of a sale, the inspector also will notify the lender. At times, an environmental hazard will stop a sale. The buyer, however, often will wait for abatement to take place.

The state agency with jurisdiction can often provide you with a list of certified contractors able to clear up the problem. Although the environmental inspection process may cost you a few thousand dollars, it eventually may save you many times the cost.

Owners should remember that each problematic environmental situation is different and unique. No one solution is right for every property and there seem to be few clear-cut answers when it comes to these questions.

The most important thing to do is research. Owners and managers should check with regulating agencies to ensure compliance, independant consultants to determine the extent of any environmental problem, and their own legal counsel should it become necessary. The best way to find out the proper course of action is to go to the source. Most regulatory agencies are easily accessed on the Internet or via toll-free telephone numbers. U

Solomon is vice president and regional quality control manager of WMF Huntoon Paige, Atlanta, a national mortgage banking firm specializing in financing for multifamily and health care facilities. Solomon is a Certified Environmental Inspector (CEI) and a Certified Property Manager (CPM).