May 15, 2005
Asbestos!! Kill the Messenger!!
In the late 1980s and continuing into the mid 1990s, the presence of asbestos in a subject property building was tantamount to "the kiss of death" to a real estate transaction. Whether or not the asbestos containing materials were in sound and solid condition or friable did not seem to matter, lenders wanted no part of it.
As time passed, asbestos materials became an accepted and routine matter of environmental liability management. After all, asbestos was a sound product of its time that accomplished its purposes. The material remains an effective insulation and fire retardant today. Nonetheless, if asbestos materials become friable, emitting asbestos particulates into the air, the health concern becomes a very serious environmental liability. Not much is said regarding this liability these days, but let's take a look at a recent case study.
The consulting firm was contacted by a long standing and loyal client. The lender was considering a loan on an older multi-family apartment building that was, in turn, being brokered by a real estate firm that had provided her and the consultant with a continuing flow of business. They had all worked together well on various properties to make the deals happen. This one would prove different and would represent past, present, and future liability concerns.
Perhaps the number one source of litigation begins with a time frame that is simply too short to do a thorough job. Nothing is ever gained by allowing time to needlessly pass during the inspection period of the purchase contract. However, the buying and selling parties involved in the transaction had less than 10 days remaining in the original 45 day inspection period when the bank and the consultant was contacted. The consultant responded immediately and was on site within two hours of the first call from his client. Still, the consultant was on his guard as to why such valuable time had been allowed to pass.
As the site inspection activities began, the consultant observed an immediate concern. The old boiler and the associated pipes were covered with asbestos wrap. The asbestos covered pipes traversed the ceiling areas throughout the basement and was observed to be friable throughout the area. The pipe wrap throughout the basement was friable to the touch. The client was notified immediately and in turn notified the broker. The lender was concerned, the broker was not. Undaunted, the broker requested that a meeting be scheduled with an abatement professional to ascertain the seriousness and associated costs relating to the issue.
The opinion of the abatement consultant was in agreement with the bank's consultant, the subject property building had significant asbestos issues regarding both friable asbestos and health hazard issues. The asbestos containing pipe wrap was in fact friable in a number of accessible areas and was shedding asbestos debris throughout the basement including the storage locker areas and hallways. Of particular note was a cut pipe wrap end in the hallway to the locker areas that was visibly shedding asbestos fibers into the hallway area and onto the hallway floor directly in the primary route of pedestrian traffic. It was the opinion and recommendation of both environmental professionals that the entire basement and contents should in all reality be immediately sealed off from public access and declared a spill response. Although the pipe wrap itself did not extend into the laundry area, that area was also readily open to the occurring asbestos contamination.
In the opinion of the asbestos professional, the entire basement area and contents was contaminated with asbestos and that the contents of the basement should be appropriately disposed of or cleaned and the asbestos containing pipe wrap abated. Costs for these activities were estimated at approximately $50,000.
In this case, the liability issues are particularly intriguing as they extend beyond the present exposure issues and associated monetary costs relating to the asbestos contamination of the basement area. The present and past residents of the building had been exposed to these areas for an indeterminate time. Additionally, repair and/or renovation work in the basement or elsewhere in the building did not appear to have included any precautions in managing potentially asbestos containing materials. Renovation work had no indications of having ever been permitted.
At the conclusion of site inspection activities, the banker, the brokers, the consultants, the buyer and seller, as well as the tenants of the building (both past and present) had all been exposed to friable asbestos. In theory (if not fact), all of these parties including the past residents had a potential case against the previous, present and future owners of the building.
The banker wisely listened to the advice of her consultant and withdrew from the transaction and the liability loop. Not surprisingly, the broker did not like the news. He managed to convince the buyer that there was no problem and that the consultants had merely overblown an "easy fix." With the seller carrying back a significant part of the purchase price, the buyer assumed title to the past and present liabilities. And so, the time bomb ticks on!
The moral of all of this is that liabilities can encompass the past, present, and future. Even if in this case the appropriate abatement measures are handled by the book, it does not close outstanding prior liabilities. With an inadequate understanding of the issues, the new owner will in all probability effect only superficial repairs and the exposure to the residents will continue.
As an aside, the messenger was summarily executed. The banker was forced by the real estate firm to withdraw another one of their projects that had already been assigned. One can only wonder where the broker will be when the time bomb goes off?

© 2005 by EARC, all rights reserved.