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Site Selectors' New Environmental Consciousness

As companies are now being assessed on their sustainability activities and successes, it's no wonder that the "environmental regulations" factor was among the top 10 in Area Development's 2007 Corporate Survey.

Apr/May 08
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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.

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