Removing Risk from the Real Estate Equation
Removing Risk from the Real Estate Equation
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Removing Risk from the Real Estate Equation
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To facilitate a sale, an increasing number of owners of contaminated property are implementing innovative risk transfer strategies that make it possible to reassign a property's environmental liabilities to a third party.

Background

Commercial or industrial properties contaminated with hazardous substances can be tough to sell.

It's easy to see why. What prospective buyer wants to take any unnecessary risks — especially if environmental concerns could make it difficult to obtain financing, limit site development plans or otherwise threaten project success?

Owners of contaminated property understand this; they face many of the same issues. To facilitate a sale, an increasing number are implementing innovative risk transfer strategies that make it possible to reassign a property's environmental liabilities to a third party. For a guaranteed fixed price, the third party agrees to remediate the property so it complies with environmental regulations.

One such owner, a confidential Burns & McDonnell client, used this strategy to support the sale of a Texas warehouse complex that was contaminated with multiple harmful compounds.

Challenge

Between 1970 and 2000, several chemical distributors occupied the Texas warehouse site, leaving behind a trail of chlorinated hydrocarbons in the soil and groundwater. While the contaminants' precise origins were unknown, an investigation in 2000 suggested the chemicals likely leaked from on-site storage containers, contaminating a patch of soil next to one building and the groundwater plume beneath two adjacent properties. The presence of more than five volatile organic compounds posed a potential roadblock as the owner made plans to sell the warehouse complex in 2003.

"Many aboveground environmental liabilities, such as lead paint or asbestos, can be fairly easily quantified," says Tom Zychinski, vice president and risk transfer strategist for Burns & McDonnell. "Contaminants that enter the soil or groundwater are more complicated."

Of those, chlorinated hydrocarbons are among the most persistent and difficult to remediate, says Mark Knaack, environmental principal and regional practice leader in the Burns & McDonnell Houston office. "Remediation can be particularly difficult when the goal is to achieve closure to residential standards, which means a property is considered safe for all uses."

Under these circumstances, owners sometimes choose to sell the property with the understanding that they will retain environmental liability, placing the funds needed for remediation in escrow. In the case of the Texas warehouse complex, however, the owner wasn't interested in managing the environmental risk in-house.

"It could take more time and money to achieve residential closure than the owner might predict," Knaack says. "A potential buyer, likewise, might hesitate, fearing that a seller might not make decisions in its best interests."

Solution

Ultimately, the real estate investment firm sought a third party that would not only clean up the contamination at the site but also accept responsibility for reaching the standards for residential closure. Both objectives were achieved under a contract with Burns & McDonnell.

Under agreements like this, funds for the cleanup are typically put into escrow to establish checks and balances on how it can be accessed. "Sometimes the cleanup is financed with the cash flow generated by the sale itself, or — as in this case — through a special insurance policy," Knaack says. "Other times, there may not be a buyer at all; an owner may just decide to contract a firm like ours to ‘buy' their environmental risks for a price."

Burns & McDonnell takes on these projects largely because it can.

"Our size, strong balance sheet and experience in this field enable us to take on these risks — and then share in the rewards of managing them effectively," Zychinski says.

The premium paid by the owner is based on the remediation objectives required by the responsible regulatory agency — in this case, the Texas Commission on Environmental Quality (TCEQ).

At the Texas warehouse complex, the contract called for an expedited cleanup — speeding up a process that could normally take a decade or more. Burns & McDonnell complied, working first with the TCEQ in 2003 to have the site entered into the Texas Voluntary Cleanup Program.

By 2004, a Burns & McDonnell team had begun the first phase of an integrated site remediation strategy. That involved removing 520 tons of contaminated soil and then, over the next five years, implementing multiple innovative technologies to reduce the contaminants to acceptable levels.

Those technologies ranged from in-situ chemical oxidation and reduction to enhanced anaerobic bioremediation. Long-term monitoring continued until 2009, with additional treatment conducted at focused locations.

Outcome

Active remediation at the site took just more than three years, followed by two years of monitoring and sampling. Step by step, Burns & McDonnell achieved site closure from the TCEQ, first meeting residential soil objectives and, later, those for residential groundwater, resulting in final regulatory closure in less than eight years.

"It's in everyone's best interests to reach closure sooner," Zychinski says. "Our aggressive approach enabled us to shave several years off the process."

For more information, contact Tom Zychinski, 314-682-1583, or Mark Knaack, 832-389-5799.

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