From SoCal Real Estate’s December 2018 issue:
Construction costs from the environmental perspective
Concern for the environment has become a necessary element of any real estate project, and the construction sector is most definitely in the thick of this concern. Balancing environmental issues with cost control in construction can be tricky, particularly in an industry where time is money and delays from environmental rules and legislation are plentiful.
Robert Traylor, PG, CHg, technical director of the site mitigation group for Partner Engineering and Science Inc., tells SoCal Real Estate his firm commonly sees environmental issues impact construction costs when it comes to developing certain historic sites and doing significant rehab/adaptive -reuse projects, which are trending up these days. “Southern California has a lot of old oil fields and wells, which have methane-gas concerns,” Traylor says. “There are also potential remediation costs if you are building on an old industrial site or an old gas station, dry cleaner, automotive shop, or other ‘high-risk’ historic use, which are fairly common throughout SoCal.”
He adds that with demos, rehabs, or adaptive reuse projects, a common cost to consider is asbestos testing and potential abatement costs.
Valerie Marshall, VP at AEI Consultants, tells us that within Orange County — including areas of Costa Mesa, Garden Grove, and Anaheim — her firm is seeing a prevalent trend of developers purchasing older, neglected commercial assets that abut existing residential properties and constructing new multifamily or mixed-use developments. “Developers of these projects must ensure not only that the new construction complies with environmental and energy-efficiency regulations but also determine if the sites require clean-up of previous contamination to meet current regulatory and health-risk guidelines.”
Marshall says that while these projects can be highly lucrative, developers must perform comprehensive assessments, determine the scope of potential remediation work, and factor this clean-up into development costs before the land is acquired in order to ensure the investment is sound.
Despite the challenges, developers keep costs at bay while adhering to current regulations and addressing environmental needs in a project. Traylor says working with your consultant and contractor to look for opportunities to utilize new mitigation technologies — such as combined moisture-contaminant vapor barriers designed to be capable of converting to vapor removal systems — can save overall remedial costs and time.
Another key savings strategy is to combine costs on a project where possible. For instance, Traylor says, if your project already involves an underground feature such as a subterranean parking garage, you can combine a dig-and-haul remediation effort with the construction, where the excavation costs are already factored into the budget.
“Developers may also consider different uses for the property commensurate with the remediation efforts that might be required for each,” Traylor says. “For example, the level of remediation required for a multifamily slab-on-grade use will be more restrictive, cost more, and require more time to achieve remediation than for mixed use–commercial under residential use, so that can factor significantly into the investment and cost savings strategy.”
Marshall says environmental-impairment liability insurance or pollution-insurance policies are options available to provide coverage that includes statutory clean-up requirements, bodily-injury and property-damage third-party claims, and legal expenses resulting from pollution or contamination incidents. “One of the major challenges facing the remediation of sites for new development is the property can often be more impacted and require more work that initially thought, and this insurance mitigates some of that risk,” she says.
Additionally, while blighted sites can require a costly assessment and remediation process, some developers seek out these properties as land availability tightens, Marshall points out. “These properties often can be acquired at relatively low purchase prices, and there is ample assistance available from state and local regulatory agencies who share the goal of streamlining the cleanup process and restoring these sites for new development.”
There are some red flags that a project will require too much environmental remediation to pencil in the SoCal region. Traylor says it will ultimately depend on the value of the property. “If it is a small property without much value-added potential, then the cost of environmental remediation may not be worth a meager long-term return. Typically speaking, if groundwater is shallow, or if the contamination issue is large enough to reach groundwater, the cost to remediate will be much higher.”
One of the first steps a developer or any interested party involved in the purchase of a property is to perform environmental due diligence to identify any environmental concerns associated with the property, Marshall says. “This will give the developer or interested party a general sense of a site’s history, previous uses, and potential environmental issues. Without completing environmental due diligence, a developer or property owners, including involved lenders, can unknowingly risk loss of property value or liability for remediation costs if environmental issues are encountered on the property after closing.”
Industrial or commercial properties and retail shopping centers are typically associated with lingering environmental issues from historic or current ‘red flag’ tenants that include gas stations, dry cleaners, auto repair, and service businesses, Marshall says. “That said, even sites presenting some of the biggest red flags can still offer opportunities for redevelopment and should be explored while developers have the option to walk away if costs become too significant.”
For example, she says, environmental consulting firms like AEI Consultants can provide developers with a conservative “ballpark” estimate to clean up and remediate a property, based on site conditions, completed site assessments, knowledge of remediation technologies, and significant experience in completing similar projects. “If the developer decides to move forward, these consultants work closely with local and state regulatory agencies, financial consultants, construction firms, and other parties who are well-versed in the regulatory and financial aspects of these redevelopment projects to advise the developer throughout the process in order to stay on schedule, on budget, and ensure all regulatory requirements and goals are met.”
Some developers are using creative strategies to meet environmental goals while keeping costs in check.
Traylor says it is critical to work with an experienced consultant that knows the specifics of the local regulatory requirements, as this can streamline the entire process (from assessing the extent of the problem through remediation and regulatory closure), thus reducing overall project costs. “One key way to do this is for the consultant to assess contamination and install remedial systems prior to engaging the agency, if all stakeholders agree to moving forward without agency oversight, thereby reducing overall costs and shortening the cleanup schedule.”
Traylor adds that from a technical approach, integrating mitigation measures (things that don’t remove the problem but lessen the risk to human health, like increased air circulation in a building or special slab sealants to prevent harmful vapors from entering the building) with remediation measures (removing the problem; for example, a soil vapor extraction with a sub-slab depressurization system) can allow a property to be leased or operated while still undergoing remediation, providing income and speeding the overall site cleanup toward a more timely closure.
Over the last 20 years regulations have continuously become tighter, necessitating a greater relationship between state agencies and the environmental consultant, Traylor says. “The biggest trend in environmental regulation is headed toward regulation of vapor intrusion on commercial sites and commercial sites adjacent to residential properties. Sites that were previously closed based on soil and groundwater assessment and/or remediation may end up having to be evaluated anew based on vapor risks.”
He adds that historically, VOC vapor barriers (those specifically designed to prevent subsurface volatile organic compounds from entering a building) have been an acceptable remedy for vapor intrusion. However, regulatory acceptance of these is waning in favor of integrated mitigation-remediation solutions. “Now, VOC barriers (considered a mitigation measure) by themselves are starting to be considered a ‘temporary’ action that needs to be supplemented with actual cleanup of the subsurface soil-gas concentrations (remediation),” Traylor says. “This change is due to agencies’ concern that slab/barrier penetrations or building settlement could produce new conduits for vapor migration into the building.”
On a state level, Marshall says California’s existing environmental regulations are some of the most restrictive in the country — and they are getting tighter. “While stricter environmental legislation will ultimately make the development process more complex to navigate in the coming years, we believe that the commercial real estate industry will continue to adapt and see opportunity in cleaning up sites deemed environmentally impaired.”
The key, she says, is for developers and property owners to stay informed regarding changes and partner with environmental consultants they trust as part of their team to guide them through the ever-evolving processes to clean up impacted or blighted properties for redevelopment.