The securitization advantage of indoor air quality assessment.

Securitization, by definition, is an effort to minimize financial risk. When preparing a pool of mortgages for securitization, the rating agency evaluates the investor's risk for CMBS or REIT transactions. The outcome of this analysis determines the rating of the securities and, ultimately, the value of the security to a potential investor.

It is critical to the investor that any significant risk factor be taken into account. With indoor air quality (IAQ) problems and building-related illnesses increasingly conspicuous in the media, should IAQ be routinely included in these assessments?

The examination of properties for potential environmental liabilities has been part of the rating process for the last 10 to 15 years. This began with the single issue of abandoned hazardous waste sites, but rapidly evolved to include other environmental concerns such as radon, asbestos, lead-based paint, and leaking underground storage tanks.

What are the potential risks involved with IAQ problems? Poor air quality can cause building occupants to exhibit symptoms that include nausea, headaches, dizziness, and other severe flu-like symptoms. The EPA estimates that these building-related illnesses cost tens of billions of dollars per year in lost productivity. Furthermore, the World Health Organization estimates that 30 percent of all buildings in the United States alone have indoor air quality problems.

The costs associated with remediating these problems varies widely. Many problems can be easily addressed. In cases where mold or bacteria have become established or building materials friable, substantial remediation, renovation and relocation of building occupants may be necessary.

For example, in DuPage County, Illinois, IAQ problems in a $53 million courthouse completed in 1990 cost the county an estimated $5.5 million. In its first year of operation, 400 of the 700 occupants exhibited signs typical of building-related illness. At the height of the crisis, over 20 people were hospitalized in a one-month period. By 1992, all personnel had to be relocated to other facilities and the HVAC system of the courthouse building overhauled to eliminate microbiological growth and ensure adequate fresh air.

In Polk County, Florida, a $32.4 million courthouse, opened in 1987, was also vacated in 1992 for similar reasons. Relocation and repair costs totaled over $40 million - more than the original cost of the building.

The Department of Motor Vehicles (DMV) in Boston was forced to relocate after only 15 months in a new headquarters building. During their brief stay, over 500 of the 640 employees experienced IAQ-related symptoms that were triggered by a commonly used fireproofing sprayed onto the building's steel beams. The estimated remediation cost (not including relocation) now stands at $14.2 million. This figure does not include the carrying costs of the building's private owner or the legal fees of either party.

Based on these (and many other case studies), clearly IAQ problems can significantly impair both property value and the cash flow of the mortgage holder. It now seems prudent to investigate all properties for obvious indicators of IAQ problems.

The scope of this investigation need not include expensive and time-consuming sampling. In fact, a time and cost effective IAQ screening program can easily be appended to the already required Phase I Environmental Site Assessment (ESA) or Property Condition Survey (PCS) scope of work.

Such a screening program should consist of two simple parts. First, a trained environmental or engineering professional should conduct a visual assessment for obvious indicators such as evidence of moisture damage, stained surfaces, poor HVAC maintenance, etc. During the course of this assessment, limited field measurements of temperature, humidity, carbon monoxide, and carbon dioxide can be taken. The assessor can then complete a checklist developed to flag noticeable IAQ problem indicators and reports of previous incidents of building-related illness.

Once gathered, this data should be sufficient to enable a qualified consultant to determine if potential risk exists. The underwriter and rating agency, armed with this information, can account for the risk and can ensure that the final rating of the securities accurately reflects their value to an investor.