Government regulation is adopting emerging
social environmental expectations. While most governmental regulations
cover permitted uses and proper disposal and remediation protocols, and
are enacted in punitive fashion, there is also emerging governmental
use of economic incentives tied to energy efficiency; promotion of
broader traffic and fuel emissions reduction through
real-estate-related activities such as transit-friendly buildings;
rebates for clean-energy use; and more. Many of these initiatives are
provided at the state and local level and should be thoroughly explored
when doing site selection due diligence.
Additionally, it is no
longer safe to assume that older properties are to be grandfathered
with respect to future operational and code standards. A thorough
understanding of an area's long-term goals for carbon neutrality and
sustainability are essential to gauging potential future costs that may
be imposed to achieve or maintain environmental compliance with
regulations. Use policies, such as water and energy consumption, and
disposal requirements are known to be fluid, and only ongoing
environmental due diligence and monitoring will capture these shifts in
a proactive manner. This allows for better asset and capital planning
and may impact an owner's or tenant's long-range plans.
For
example, if it is determined that future compliance costs will erode
returns to an unacceptable level, an owner may reconsider his holdings
or decide to reposition the asset, or a tenant may seek a new location
upon lease expiration or limit its future exposure to cost increases
through lease negotiations. While many of these considerations appear
to be focused on asset ownership, the same level of review can yield
beneficial information regarding the viability of maintaining current
operating cost structures and will allow an accurate evaluation of one
asset versus another in the context of likely environmental costs
differentials.
Additional costs are proving less than
perception. An argument commonly proffered in the investment and
development community had been that initiatives such as building to
LEED certification added additional costs that would not be recognized
in economic returns. Current investment industry information now
supports the conclusion that building to LEED specifications only adds
3-5 percent to a project's total costs. Even more compelling is the
news that LEED certification is now adding significantly to the market
value of the completed project, i.e., buyers are paying premiums for
LEED-certified products.
LEED projects also are demonstrating
lower ongoing costs of operations, which will have significant
cumulative impact on asset value over its hold period. In addition,
funds are specifically being raised in the investment community to buy
"green" real estate. The product currently isn't being built fast
enough to meet demand in certain asset sectors, further boosting asset
values. This has increased the flow of capital investment into
LEED-certified assets, which will also expand the supply of efficient
assets from which site selectors can choose.
The Expanding Universe of Environmental Due Diligence
With
both governmental regulation and market-driven reasons behind the
expanding breadth and depth of environmental due diligence, there is an
increasing need for awareness of the multiple areas one needs to
consider, regardless of what role one plays within the environmental
continuum.
For instance, the types of potential liability
associated with ownership of real estate or land continue to increase.
Close monitoring of governmental regulations regarding use of real
estate, materials use and disposal, emissions and byproducts is
necessary on an ongoing basis, at both national and local levels, and
may change during ownership tenure. Knowing historical uses prior to
chain of title is important, but is not what is most likely to have a
negative impact upon liabilities associated with ownership.
Close
monitoring of tenant activities is also required to actively monitor
and mitigate chain of title risks, and the ability to do so should be
addressed in any leases an owner enters into with a tenant. It is
important for owners to have thorough environmental protocols from an
operational standpoint. This is essential to effective risk mitigation
and proof of environmental regulatory compliance, and is, in essence, a
form of continuous environmental due diligence.
