Magazine article Journal of Property Management

A Portfolio Manager's Guide to Environmental Decision-Making

Magazine article Journal of Property Management

A Portfolio Manager's Guide to Environmental Decision-Making

Article excerpt

Real estate investors, lending institutions, and pension funds are among the growing ranks of financial managers that insist on environmental audits as an integral part of the due diligence process for real property acquisitions.

As the rate of property appreciation has diminished in recent years, the margin for error in real estate investment has grown smaller. The economic feasibility of an investment may be affected both directly and indirectly by environmental factors. A failure to consider such factors may result in unrealistic forecasts for the timing and amount of a project's expected return.

The California Public Employees Retirement System (PERS) manages a 56-million-square-foot portfolio. Over the past five years, PERS has turned to new strategies for monitoring the environmental health of its portfolio over the lifetime of the investment.

Until recently, PERS' environmental program consisted primarily of the performance of an environmental audit at the time of acquisition of a property and other general policies dealing with tenant leasing issues, asbestos, and underground tanks. But as the myriad of environmental regulations arose during the 1980s, the fund realized that pre-acquisition audits alone were not sufficient to protect the environmental quality of its real estate assets.

Horror stories abound in which the cost of an environmental cleanup actually exceeded the value of the property. Uncertainties regarding trends in environmental laws have created new fears among investors. In addition, because it is frequently difficult to estimate with certainty the cost of cleanup, some buyers simply will not consider purchasing property known to be threatened or contaminated.

"While earning high marks for due diligence reviews at the time of property acquisition, PERS managers felt they needed a more comprehensive program to manage and minimize environmental liabilities at properties it already owned," says Roger Franz, PERS principal real estate investment officer.

In an effort to provide guidance to its advisors and to standardize its approach to environmental issues within its portfolio, the fund developed a corporate environmental policy manual.

To help the fund accomplish this goal, PERS managers retained Versar, Inc., a nationwide environmental risk management company, and Jones Day Reavis and Pogue, PERS' corporate counsel. The environmental policy established a framework to control environmental concerns with the ultimate goal of improving the performance of PERS' investment properties.

Environmental standards were established for property acquisitions, leasing issues, asset management, property sales, use of environmental consultants, and environmental cost recovery.

The manual also contains technical guidance for each area of environmental concern including underground storage tanks, asbestos, tenant handling of hazardous materials and wastes, indoor air quality, radon, lead hazards in paint and drinking water, radon gas, polychlorinated biphenyls (PCBs), and electromagnetic radiation (EMR), among others.

The approach taken acknowledges the importance of informed environmental decision-making at each stage of property ownership, including acquisition, asset management, and disposition. The manual is reviewed and periodically updated to stay abreast of new trends in environmental regulations and case law involving environmental liability.

The policies apply to real property acquired or held by PERS, by PERS' borrowers, and by its trust and other accounts for which PERS acts in a fiduciary or agency capacity.

The fund's approach to environmental portfolio management stresses site-specific application of the environmental policy and specialized training of asset management and property management personnel. The policy manual serves as the basis for development of site-specific environmental plans at all PERS-owned properties. …

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