Washington Insider - Mold and Commercial Real Estate

Mold. Quickly rising as a hot topic among homeowners, this epidemic is now surfacing more frequently in the commercial real estate arena. States are drafting legislation and regulations, lawsuits are being filed against owners and developers and insurance companies are altering policies or removing coverage from future policies. So what does this mean to you?

As far back as ancient times, we’ve recognized mold as a problem that affects our health. And we know the basics of mold–it can grow on wood, sheet rock, insulation and other surfaces and is triggered by leaks, flooding, flawed landscaping, poorly managed HVAC and damaged building materials.

Customarily, we assume that mold is a regional problem that affects properties only in warm climates. Based on pending litigation and recent case studies, we are beginning to recognize that mold can grow anytime, anywhere.

In a recent survey of Naiop members across the country, 65% of respondents cited mold as a key problem within their organizations. Members from Arizona to Massachusetts are tackling mold issues or gearing up for state and federal legislation and regulatory changes.

An industrial developer in Texas spends more than $10,000 per month on inspections and remediation against mold infiltrations. A manager of more than 15-million sf of institutional-investor properties in Dallas and other cities, this developer is implementing programs for property managers to look for potential mold sites–including leaking plumbing, soda machines, windows and roofs–where water can penetrate and rest.

Additionally, the developer is considering rewriting leases to include provisions that tenants be responsible for monitoring would-be mold-growth areas. Facing a 100% increase in his own insurance premiums and expected legislation from the state government, the developer has chosen to be proactive within his properties.

In July, the Hilton Hawaii Village found evidence of two types of mold in two of its hotel towers. Found by a housekeeper in the bottom of drawers and on room furniture, the Hilton emptied the 453-room Kalia Tower, built in 2001 for $95 million.

The Hilton is not the first or only property to experience mold dilemmas in Hawaii. In 2001, a county building in Maui was evacuated and remediated. Clean-up costs, estimated at $450,000, included the removal of mold from ceilings and the installation of a new air-conditioning system. And in 1995, the Hale Koa Hotel had severe mold, blamed on poor construction and design, and spent $5.5 million to fix the problem. In August, two Hawaii federal buildings were treated for mold remediation after water leaks.

With the intensification of reported mold cases comes proposed legislation and regulations. To date, there are no federal or state standards for acceptable mold levels in buildings or homes and no pure scientific evidence that mold poses a lethal health threat. But the mold scare has prompted many states–including Texas, California and Maryland–to enact mold-related legislation.

California’s Senate Bill 732–dubbed the Toxic Mold Protection Act–was passed on January 1, 2002 and is considered the most comprehensive piece of mold legislation enacted to date. The law demands written disclosure of the presence and location of any existing mold infestation to prospective tenants or purchasers of commercial or residential property.

In Maryland, the state Senate passed Bill 283 in April 2001 to establish a task force to study the location, nature and extent of environmental and health risks posed to workers as a result of molds, spores and other toxic organisms found in HVAC systems. Maryland released the findings of the study in July 2002, recommending that primary statutory authority for regulating indoor air quality be granted to the Maryland Department of the Environment, as well as establishing an Office of Indoor Air Quality.

Texas enacted House Bill 2008, requiring the State Board of Health to establish voluntary guidelines for indoor air quality in government office buildings.

Increased legislation has affected insurance companies particularly, some of which have seen a 500% increase in mold-related claims. Consequently, insurance companies are now more frequently denying coverage for mold damages and instituting mold damage exclusions.

To Naiop’s membership–and to the commercial real estate industry as a whole–mold is an up-and-coming issue that will most certainly take center stage as detections, treatments and the resulting legislation and increased insurance costs begin to show their effects. Naiop believes that the mold issue will intensify within the industry, and we are working to ensure that our membership stays informed.

Naiop supports federal-government allocations of needed resources to develop sound sciences and to counter regulatory or legislative action that is not based on reliable data. In addition, we support the federal funding of research that will eliminate the unknowns of mold.

As a result of the attention mold is receiving on both the state and federal legislative levels, Naiop is taking an active role to coordinate resources with several key industry associations. Leading the charge is the Real Estate Advocacy Group for States, which has created a sub-committee to monitor legislation related to mold. Under consideration is the formation of a coalition of national associations to educate memberships and advocate for sound science. Naiop has also established a section on its Web site for Mold resources.

We continue to track proposed and passed legislation, federal and state regulations and insurance companies’ response to the increase in claims by collecting information from our members. To keep our members and fellow industry professionals aware of the most up-to-date news, Naiop will host a conference focusing on mold and commercial real estate, March 4-5, 2003, in Dallas. If mold is a dilemma your organization is facing, we hope you’ll join us in this venue to hear from industry experts and learn the facts property owners and developers need as mold continues to intensify in our industry.

Thomas J. Bisacquino is president of the National Association of Industrial and Office Properties, the Washington, DC-based trade association for developers, owners, investors and asset managers in industrial, office and related commercial real estate. Founded in 1967, Naiop is composed of more than 10,000 members in 48 North American chapters. For more information, visit www.naiop.org.