Common Environmental Issues Associated With CRE in 2022

Published: 10-26-22    Category: Environmental

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

Environmental issues associated with CRE

The commercial real estate industry is one of the largest end users of the world’s natural resources.

As the demand for office, retail, industrial, and other types of real property continues to grow, how will this impact the environment?

Many of today’s environmental issues are rooted in how we use land and develop new spaces, and there are a variety of common environmental issues that are unique to CRE that you should be aware of as an investor or prospective buyer.

Let’s dive in.

#1 – Climate Change

You should consider the risks associated with climate change before making any investment decisions with CRE. Is the property you want to buy in the middle of a new flood zone or at a higher risk of climate-related wildfires?

If so, it might make more sense to buy elsewhere.

Climate change can also affect your ability to get financing. Some lenders may not lend on properties located in areas where flooding is likely.

In addition, 24 states have passed laws requiring additional fees and offsets related to climate change. These fees could increase the cost of building projects.

#2 – Emerging Environmental Contaminants

Onsite contamination can be a major problem for buyers who want to buy real estate. Potential CRE investors should consider the possibility of onsite contamination via emerging environmental contaminants before buying real estate.

These contaminants can include:

  • Water disinfection byproducts;
  • Gasoline additives;
  • Manufactured nanomaterials;
  • Perfluorinated compounds;
  • And more.

Onsite contamination via these contaminants can lead to expensive cleanups and other liabilities. Always conduct due diligence before buying a site.

#3 – Regulatory Non-Compliance

There are many different kinds of environmental regulations that are enforced by agencies like EPA and DEQ.

These laws can be very complicated and costly to comply with. In some cases, they can even prevent you from buying certain properties.

For example, if commercial land is the current home to certain protected species, you can forget about acquiring it for profit.

The best way to avoid these problems is to do your homework before investing in CRE. You should know what kind of environmental regulation applies to the property you want to purchase.

This includes knowing which federal, state, and local agencies cover the property, as well as if the current owners complied with regulations.

#4 – Hazardous Waste

Property owners must ensure that hazardous materials are properly disposed of after use. Above and below-ground tanks are common storage locations for hazardous materials.

Smaller quantities of hazardous chemicals are often stored or used on site.

Before buying commercial real estate, it’s imperative to know if existing and/or previous tenants and owners properly disposed of waste and its location.

#5 – Environmental Liability Defenses

Environmental liabilities are a growing concern for property owners and managers. These liabilities can be costly to defend against and may require significant time and resources to resolve.

It’s important to understand how to protect yourself from potential liability.

In order to protect themselves from future claims, sellers need to disclose all known environmental liabilities associated with their property.

Sellers should provide information about the following:

  • The type of environmental liability (e.g., oil spill);
  • Location of the liability;
  • How long has the liability existed;
  • Whether the seller was aware of the liability when they bought the property;
  • What actions were taken to address the liability;
  • Who is responsible for paying the liability.

New owners who fail to take steps to mitigate existing environmental problems will lose the protections afforded them by the bona fide purchaser doctrine.

#6 – Green Building Certifications

The increased emphasis on green buildings has given rise to rating systems focusing on environment-friendly buildings. Green building certification programs exist to ensure that the built environment meets environmental standards.

These programs are voluntary, however, most states require that properties meet minimum standards.

Some jurisdictions mandate that new construction includes specific features or amenities that meet environmental building standards.

This is good for both communities and businesses as green building ratings help property owners save money and improve the marketability of their properties.

#7 – Indoor Air Quality

Indoor air quality is an important issue for both multifamily and commercial buildings. Indoor air pollution comes from a variety of sources, including cooking fumes, tobacco smoke, cleaning products, furniture, carpets, and other items.

If indoor air quality is not maintained properly, tenants could suffer health issues.

There are many ways to improve indoor air quality in commercial buildings. For example, ventilation systems can remove pollutants from the air. Properly installed HVAC systems also reduce energy consumption and costs.

#8 – Air Pollution

Air pollution affects land negatively, and it can come from multiple sources, including industrial plants, power plants, vehicle emissions, and even natural gas leaks.

Industrial facilities emit large amounts of particulate matter into the atmosphere. This can hurt the resale value and create liabilities for CRE investors.

Landowners can request government agencies to limit pollution. Air pollution is usually controlled through legislation. However, if you own land near a major source of air pollution, it may be difficult to get the government to restrict its activities.

#9 – Tenant Activities

Prospective buyers should obtain copies of any existing leases that exist on the property they’re looking to buy and examine them carefully.

Make sure that tenant leases do not contain provisions that would prevent the landlord from selling the property or that enable tenants from participating in activities that would cause environmental harm.

For instance, if a tenant owns a business that generates hazardous waste, the property owner or investor could end up responsible for cleaning it up properly.

Avoid Environmental Issues With Environmental Site Assessments

An environmental site assessment is a comprehensive analysis of a property’s physical characteristics and potential impacts on human health or the environment. It includes a review of historical data, current conditions, future development plans, and any other relevant information.

CRE investors must consider paying for an environmental site assessment when purchasing commercial real estate.

The cost of an environmental site assessment depends on several factors including the size of the property, the type of project planned, and the number of people involved in the project.

A well-designed environmental site assessment can help protect your investment by helping you avoid costly environmental issues later on. Additionally, buyers and sellers should consult with an experienced environmental professional or attorney before agreeing to buy or sell real estate.

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