Mold nixes real estate deals.

More than 75% of builders and real estate lenders have heard of a party backing out of a real estate transaction because of mold problems, according to a new poll conducted by Environmental Assurance Group (EAG). In addition, respondents familiar with mold-related incidents in commercial real estate transactions said it takes an average of $11 million to remediate.

The survey of 40 high-profile real estate developers and banking executives was undertaken by consulting firm EAG to assess mold's financial impact on the real estate market. As mold and the resulting lawsuits have spread across the country, many builders and lenders are taking precautions to protect themselves from liability because of the mold exclusions written by the insurance industry in the last two years.

"This survey confirms the worst fears of major stakeholders in the real estate business--mold is costing big money," said Charles Perry, principal of EAG and a member of the Mortgage Bankers Association mold task force. "Since insurers fled the scene, liability claims have escalated and the devaluation of loan collateral has accelerated. Now lenders, who hold 80% of the risk on a standard real estate transaction, and developers, who hold the other 20%, are scrambling to mitigate risk from an environmental problem that could surpass asbestos and lead paint in its financial consequences."

In fact, when asked what kind of environmental contamination they feared the most in a real estate project, more than half (24 of 40) of those surveyed cited mold. In contrast, asbestos ranked a distant second (eight of 40), followed by mercury (two of 40), and radon (two of 40). Seven respondents chose "all of the above."

"How has mold risen to the top of the worry list so fast?" said Perry. "Because to date we've not been focused on preventing mold; we've only been looking at how to fix the problem. Unfortunately, there is no 'cure' for mold. It has baffled many builders and remediators with its ability to reoccur just weeks after it has been scraped or sprayed away. That contrasts sharply with asbestos, lead paint, and other hazards that are considered 'gone for good' after the contamination has been removed or contained. For the lender, if a borrower defaults and you can't guarantee clean-up on the property, it greatly compromises your ability to get your money's worth out of the investment. If commercial tenants or building managers are spending millions of dollars to remediate a mold infestation, how protected can lenders be if the mold returns in 30 days?"

More than half of the real estate industry executives polled (23 of 40) have been involved in or are aware of a real estate transaction where a mold problem arose while the deal was underway. More (25 of 40) were aware of a mold problem or issue holding up a real estate transaction, and 24 of 40 respondents were aware of mold problems revaluing a real estate transaction.

According to Perry, the conditions required for mold to grow include: the existence of mold spores, moisture in the air, a normal temperature range, and the presence of a food source. Since temperatures, airborne spores, and moisture are facts of life, the only controllable variable is the food source--cellulose or paper, primarily in the form of paper-faced wallboard, paper-faced insulation, roofing and ceiling products, and any other organic building material.

"Paper--especially recycled paper, which is what is found on standard wallboard--is the primary food for mold," said Perry. "Standard wallboard comprises around 80% of the surface area in any post-50s building, and unfortunately, if it's paper-faced, it makes a great home for mold, as does paper-faced insulation. Some lenders are beginning to consider mandating use of paperless building products in connection with new construction loans, but contractors and architects are becoming somewhat concerned about the difference in price when they bid. However, the cost increase--a trivial fraction of the property's sale price--now pales compared to the future benefits to all involved. If a property owner, investor, or lender understands that you're trying to protect them from this potential financial disaster, they will likely look at the bids in a different way and not just go for the low ball."

Some builders have already adopted mold-resistant construction techniques (i.e., a capillary break under the foundation, a waterproof roofing system, windows with low potential for condensation, and newly developed mechanical ventilation systems). It is not possible to prevent moisture from entering the structure, but the new techniques are designed to avoid excess water buildup and reduce the likelihood of leakage.

"Lenders are also considering the requirement of mold inspections pre-, during, and post-construction for new real estate loans," said Perry. "Unlike most inspections, a mold-specific (Indoor Air Quality) engineer will know where, how, and when to look for it, saving the lender, the borrower, and the builder thousands of dollars as well as litigation nightmares. I know a builder who caught a subcontractor putting up wallboard by nailing slats into a ceiling that were black with mold. These were new materials that bad just been sitting at the job site for a couple of days, and already mold had totally covered them. If the builder hadn't caught it, those slats would have stayed in the ceiling, and the mold would have metastasized to the paper-faced wallboard and throughout this million-dollar home."