Breaking the Mold: In Recent Years, Significant Progress Has Been Made in Creating a Rational Basis for Dealing with Mold and Dampness Issues in Commercial Real Estate

By Alleman, Thomas B. | Mortgage Banking, July 2006 | Go to article overview

Breaking the Mold: In Recent Years, Significant Progress Has Been Made in Creating a Rational Basis for Dealing with Mold and Dampness Issues in Commercial Real Estate


Alleman, Thomas B., Mortgage Banking


Readers of The Wall Street Journal's "Property Report" on Dec. 4, 2002, are now well aware of some of the problems mold has caused to real estate. The Journal reported that the Hilton Waikiki Village Hotel had closed 453 guest rooms and taken a $20 million charge because of mold issues (it later would file suit against virtually all of the contractors, engineers and architects involved in the project). The Journal also reported that Englewood, Colorado-based Archstone-Smith, a major owner of apartments in 22 states, was spending more than $20 million to remediate a mold outbreak in a single high-rise building in southeastern Florida. [??] If these two incidents were not enough to alert readers to the problems mold apparently poses to commercial real estate, the Journal also reported that a buyer had backed out of a large deal to purchase a 250-unit multifamily complex just prior to closing, because of mold issues. [??] Journal readers would hardly have been amiss in concluding that mold appears to be a serious and growing problem. [??]

Issues and perceptions

The Journal's choice of cases to report on back in 2002 illustrates the problems that make mold such a potential challenge for the commercial real estate industry. Consider some of the ramifications of just these two reported cases.

What impact would closing 453 units in a flagship property in a popular destination have on cash flow, and thereby to Hilton's ability to pay off construction loans or other financing?

When word got out that Archstone-Smith had spent a huge sum to remediate a single building, what impact would it have on present or future occupancy? Would the value of the structure be affected by the stigma of having been infested with mold, despite a certification that remediation had been properly completed? And what were the ramifications for the seller, the buyer and the lender when the buyer refused to perform because of alleged mold issues? Would the building ever sell? Would it ever sell for the same price?

By year-end 2002, questions like these loomed in the minds of many in the commercial real estate and lending markets. What's more, many responded based on high levels of misperception. Back then there was relatively little objective information available on mold or its health effects, or on how much mold was necessary to cause adverse health effects. The discovery of any kind or amount of mold in a structure often prompted individuals to fear the worst, even when such fears were not objectively justified.

No standard protocols for mold testing or remediation existed, so the discovery of mold anywhere in a structure often prompted individuals to demand testing everywhere--even when the expense of such testing far outweighed the benefits or need for it.

The situation was not greatly different from the first days following passage of the federal "Superfund" law (the Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as CERCLA). Perhaps the only difference was the fear levels surrounding mold were higher. Unlike toxic waste dumps and underground storage tanks, mold was and is ubiquitous. It can turn up anywhere it can find sufficient warmth, moisture and organic materials for nourishment.

Filling the information gap

The cause of much of the misperception was a lack of reliable information on mold's toxicity and health effects. There was a similar lack of reliable information on other aspects of mold contamination and remediation, as well as the absence of a standard protocol or vocabulary that could be used in conducting assessments of mold hazards in structures.

The National Academy of Sciences (NAS), Washington, D.C., provided the first answers to questions concerning health and toxicity issues in its 2004 study, Damp Indoor Spaces and Health (available at www.nap.edu/books/0309091934/html).

In 2005, the Mortgage Bankers Association (MBA) released its mold white paper, Mold: Steps Toward Clarity (available at www. …

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