Indoor air quality is the new environmental driver for commercial real estate.
Case in point: Last summer, two state agencies ordered the evacuation of several properties near downtown Grand Rapids due to the discovery of solvent vapors from a former dry cleaning operation in the neighborhood. The discovery resulted in involvement by the U. S. Environmental Protection Agency and remains under evaluation.
While such dramatic incidents are rare, the potential dangers posed by indoor air pollution and “vapor intrusion” from underground contamination are receiving a lot more attention from government agencies. These issues are also playing an important and growing role in environmental evaluations by prospective purchasers and tenants — and by their lenders.
The Michigan Department of Environmental Quality’s proposed budget for fiscal 2018 includes $2.6 million to investigate properties affected by vapor intrusion — an issue characterized by MDEQ Director Heidi Grether as “a considerable public health risk” in recent testimony before a Michigan House subcommittee. Although vapor intrusion can occur anywhere, it is most closely associated with older urban neighborhoods, which tend to be closer to sources of underground pollution that have the potential to create vapor migration and intrusion issues.
In my law practice, which focuses on the purchase, sale and financing of environmentally challenged properties, I am seeing a marked increase in the number of deals that require clients to address actual or perceived threats to indoor air quality. That trend is going to continue — and accelerate.
Here’s why: Over the past 30 years, environmental due diligence in commercial real estate transactions has become more accepted, better understood and more uniform. Although we continue to see variability, most players in the real estate arena share a common understanding of the ground rules.
Also helping foster predictability and stability is the risk-based system of cleanup criteria established under Michigan law. Where historical industrial activity has resulted in pollution, we do not require elimination of every vestige of past human activity.
Rather, cleanup is required to the extent necessary to protect human health and natural resources. As a common example, many Michigan downtowns are built on foundry sand, cinders, fly ash and other materials that do not pose a threat as long as they are left in place and covered by pavement or buildings. Likewise, connection to a public water supply eliminates most of the risk of someone drinking contaminated groundwater.
This risk-based approach to historical environmental impacts has given rise to familiar clichés: Contaminated soil? Don’t eat the dirt. Contaminated groundwater? Don’t drink it. To the extent these bromides ever reflected reality, they are now going by the wayside as we confront indoor air quality: “Don’t breathe the air” is not a good option.
Vapor intrusion is not a new issue. MDEQ has had standards on the books for many years to assess the risk that chemicals in soil and groundwater can “volatilize” and enter buildings in vapor form through drains, sumps and porous concrete foundations.
What is new is over the past couple of years, the MDEQ essentially has abandoned the existing standards as being inadequate. Instead, the agency is using more rigorous indoor air limits and other values contained in a 2013 guidance document.
The MDEQ also is advancing formal amendments to its regulations that will, if adopted, significantly increase the number of properties presenting vapor intrusion concerns.
Under Michigan’s principal environmental cleanup law, an owner — and, in many cases, a tenant — of known contaminated property must exercise “due care,” which includes taking action to mitigate “unacceptable exposure” to designated chemicals. The “unacceptable exposure” is determined by reference to the MDEQ’s regulations — which, as noted above, may be undergoing significant revision in the near future.
We can expect due care to become a more significant issue in commercial real estate transactions by virtue of the increasing focus on indoor air, with implications for construction, renovation, due diligence and financing.
Scott D. Hubbard is a partner at the law firm Warner Norcross & Judd LLP where he counsels clients on environmental liability, compliance and planning issues. He can be reached at firstname.lastname@example.org.