Industrial properties have the highest level of environmental risk in commercial real estate, except for maybe pharmaceutical facilities. However these labs are typically staffed with highly trained personnel and have a high level of regulatory scrutiny.
Industrial properties that store, use and discard hazardous materials are governed by several federal laws. The basic one is the Resource Conservation and Recovery Act (RCRA), which is the principal federal law in the United States regulating the disposal of solid and hazardous waste. In addition, Title III of the Superfund Amendment and Reauthorization Act (SARA) requires operations that have hazardous materials on site to share information with state and local emergency planning authorities. It sets regulations for the right of the public to access information on chemical hazards in their community, and the reporting responsibilities for facilities that use, store, and/or release hazardous chemicals and keep Material Safety Data Sheets (MSDS) (see this sample MSDS) of the materials on site for employees’ response.
In order for a material to be covered under the RCRA it has to exhibit one of the following characteristic: ignitability (i.e. flammable); reactivity (think explosion); corrosiveness (think acid); and toxicity. The requirements of the RCRA apply to all companies that generate, store or dispose of hazardous waste in the United States.
A hazardous waste, which may be found in different physical states such as gaseous, liquids or solids, is a special type of waste because it cannot be disposed of by common means like other by-products of our everyday lives. Depending on the physical state of the waste, various treatment and solidification processes might be required.
The amount of hazardous waste that can be stored as well as the time allowed for storage is regulated by RCRA. The owner (or in legal terms the “generator”) of the hazardous waste is the tenant. Sound hazardous materials management includes the proper storage of waste (typically in 55 gallon drums that contain a hazardous waste label), and transportation by a licensed hazardous waste hauler to a certified landfill. The paperwork for this task is the Hazardous Waste Manifest, which must be filled out by tenant, the hauler and eventually the disposal site operator with a fully executed copy returned to the generator.
A Case Study – Managing Industrial Tenants
In 1992 I headed up a small environmental management group at a full service property management company (management, leasing, engineering, construction) whose parent company was a pension fund real estate advisory group. The PM company managed all of the properties in the advisory’s portfolio. There were 40 industrial properties, from Washington State to Florida.
Although there were a large number of industrial properties, no one knew anything about which tenant operations posed environmental risks. When one of the industrial properties in the portfolio had a bad fire with both the fire department and the hazmat team being called to the site, the need for appropriate hazardous materials management strategies became apparent. Since the properties were owned by pension funds, the parent company was very concerned about the publicity that an event like this could create, and were keen to explore ways to prevent something like this happening in the future.
Since nobody had any information about the industrial tenants’ use of hazardous materials I suggested that, over the course of a year, we should visit all the tenants at the properties that had hazardous material.
Talk to your tenants!
I created a Tenant Operations Inquiry (TOI) form, and to start, the industrial property managers were to give it to each existing tenant. In addition prospective tenants would be asked to complete the form as part of the lease application. The information provided in the TOI allows property management to deal with their tenants from an informed position, and the tenants’ operations during their occupancy can be placed in proper perspective with regard to environmental risks. This new procedure would allow the Environmental Group to focus on those tenants that need closer scrutiny.
Based on their answers to the TOI, we created a list of the tenant operations that would require a visit. Tenants who indicated they possessed a total quantity of chemicals greater than 100 gallons or who had on-site printers, machining operations, plating operations, chemical distributors, swimming pools, cleaners/janitorial supplies, fertilizers, or photo processing and x-ray chemicals were noted to be visited. Laboratories (research, analytical, medical, and radiological) medical/dental clinics, chemical repackaging or hazardous waste storage operations and vehicle repair shops were also included. This allowed us to identify those tenants with issues (assuming no one tried to hide anything!) and reduced the number of tenant visits to those that mattered.
Putting the TOI to use
You will see that the TOI form is written to collect a lot of data that can be used to assess the environmental risks, including whether or not the tenant has to file a SARA Title III report and what their hazardous waste generator number is.
However there can be issues with tenants completing the form. A key issue is that the hazmat inventory of a tenant can change from month to month. This case involved a few tenants with many compounds in small quantities, and we used a number of different solutions. The most common resolution was a sixth month requirement for a renewed inventory: short enough to keep up with the issue and long enough for the tenant not to think it a burden.
We discussed any history of spills and checked for the presence of appropriate spill control material, we looked for staining around the storage areas and at the truck docks/doors, confirmed the availability and location of MSD sheets, and did a walk around the building looking for exterior staining. Admittedly these visits do not compare with the sophisticated Environmental Compliance Audits that are conducted today, which more methodically assess handling, storage and disposal of hazardous substances; equipment faults; human health risks and any environmental permitting and recordkeeping issues. At the time, our goal was simply to inform senior management where these issues were.
In the absence of an in-house environmental compliance team, property management companies can replicate the process by selecting the right environmental consulting team with experience in industrial hygiene services and hazardous materials management. Investment in industrial property is seen as a big part of 2014 commercial property business. Environmental Site Assessments for the equity investor should include an evaluation of the tenant profile and current owners should consider a program during ownership that will avoid surprises when the property comes up for sale.