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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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Emerging environmental compliance and reporting regulations, combined with stricter reporting of contingent liabilities for corporations under pension laws and Sarbanes-Oxley, should also cause corporate owners of real estate to thoroughly assess the merits of direct real estate ownership and to make sure that they are accurately reporting on their real estate holdings under these various newer legal requirements.

Corporations can no longer assume that cessation of use will cause liability to diminish; they are still required to report liabilities for these assets and to hold reserves against them. Costs of ongoing compliance must also be factored in when conducting regular hold/sell and valuation analyses. From an owner/investor perspective, if applicable, there needs to be a component of ongoing monitoring of emerging regulations, mandates, timing and assessment of resulting capital obligations, increased liabilities, and impact on operating costs.

Active environmental due diligence requires that owners maintain operating protocols designed to ensure compliance with regulations, but they should also be designed to drive enhanced efficiency of operations in areas such as energy management, air quality, recycling and adaptive reuse of materials, use of more efficient and environmentally safe materials and products, etc. Site selection criteria for tenants should be consistent with these desires and provide a means for evaluating the owner/operator's success.

Environmental checklists are being developed by both companies and site selection specialists to help companies thoroughly evaluate their options. These are areas that can help improve the bottom line for the property as well as for its tenants, representing a win-win situation and demonstrating the ability to achieve greater value over the long run. Standard operating procedures should be reviewed when considering ownership and/or tenancy at a property. If the property is not operating in a manner that allows the tenant to comply with its own environmental operating goals, it is important that the environmental due diligence process be designed to vet this issue. For example, it could be disastrous from a company's perspective to wind up occupying buildings that are found to be poor environmental stewards if its stated policy is to be carbon neutral.

From an ownership perspective, adoption of a continuous improvement approach to environmental review will lead to better risk mitigation, enhanced operating performance through adoption of best practices, and better information to use in positioning the asset in the marketplace and for consideration of the merits of future capital investment. Good environmental review of operations can achieve cost savings of 50 to 90 percent on water costs, and 30 to 35 percent on carbon and other energy-related costs. This obviously helps tenants achieve the same operational and environmental impact goals.

A Holistic Approach and the Impact on Site Selection
Given the expanding and dynamic nature of environmental impact considerations relative to real estate, effective environmental due diligence must be a continuous improvement proposition. It is being conducted by multiple parties including owners, tenants/users, governmental bodies, and consumers. The standards and hallmarks have clearly shifted to include broader social expectations regarding sustainability and collective community impact on the environment. These shifts have manifested themselves in not only expanded environmental due diligence regarding chain of title (historical and prospective) but also of ongoing operations. Thus, regardless of the industry vantage point from which you consider environmental due diligence, now is the time to review the adequacy of your process in relation to understanding the issues being assessed by the other industry participants.

Adoption of a holistic, continuous improvement approach will provide multiple benefits including better compliance and risk management, improved operations, better value creation, and enhanced participation in newly emerging community expectations regarding environmental responsibility. When considering environmental factors in the site selection process, the weighting of specific attributes must reinforce a company's broader corporate social responsibility goals and mission.

Site selectors should also consider the market-based attributes like a community's own policies and mandates regarding environmental considerations (i.e., green building practices; air quality; recycling programs; use of incentives, mandates, or fees; transit patterns; etc.). After market comparisons, attention will naturally turn to a favorable market representing the asset-based operational attributes that are sought, e.g., adoption of green cleaning products, energy efficiency measures, recycling programs, the use of clean energy, etc. These factors must be determined and weighted against all of the other location selection factors during the normal site selection process and compared in relation to their overall ability to meet a company's own environmental goals and objectives.

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