Niche properties
Cleaning Up After Dry Cleaners
New Environmental Insurance Products and Other Solutions Help Make Contaminated Retail Properties Viable.
By Gary Keyes |
While environmental contamination often is associated with industrial sites, dry cleaners—a staple of retail centers—sometimes have their own dirty laundry to air. Cleaning up dry cleaning solvent that has contaminated groundwater aquifers can cost millions of dollars. When the dry cleaning operator doesn’t have the insurance or assets to pay for the cleanup, the property owner often is liable, with costs that easily can exceed the equity in a retail center.
Approximately 35,000 retail dry cleaners operate in the United States, according to the Silver Spring, Maryland-based International Fabricare Institute (IFI). That figure doesn’t even include the larger number of former operations. While comprehensive statistics aren’t available, an Arcadis Geraghty & Miller survey of insurers estimates that more than 70 percent of past and present dry cleaners accidentally or intentionally have released chemicals into the soil or groundwater, and the cleanup costs range from tens of thousands of dollars to several million dollars, averaging about $500,000 per cleanup.
As a result, some retail property owners and managers now refuse to lease to dry cleaners with on-site plants and avoid other potentially environmentally hazardous tenants, including photo-processing shops and gasoline service stations. To be sure, many operators of these facilities handle and dispose of their chemicals in full compliance with state and federal laws and regulations. Moreover, dry cleaning equipment technology and hazardous waste handling have improved substantially in the last 10 years, so that releases are less common.
Some operators intentionally have discharged waste dry cleaning solvent—tetrachloroethylene, also known as perchloroethylene, PCE, or perc—or separator or filter rinse water into landscaping or storm water drains. But a surprising number of chemical releases into the soil and groundwater have occurred unintentionally from the leaking sanitary sewer lines (which flow to wastewater treatment plants) into which many operators legally discharged their waste. Many of these releases occurred years or even decades ago when such disposal was standard practice and was legal. Today, the legal question is whether municipalities share some of the legal responsibility for cleanup of leakage from sewers that they own under city streets. Either way, the property owner often ends up liable, because many cleanups result from operations that no longer are in business or operations that have insufficient assets to cover the cleanup liability.
This liability leaves many property owners, managers, and brokers looking for new options. Recently, a variety of solutions, including state cleanup funds, guaranteed cleanups, insurance, and technology, have emerged.
Turning Fear into Opportunity
In addition to the retail property owners who won’t accept dry cleaners as tenants (some accept dry cleaning drop-off storefronts as long as the actual cleaning process is performed elsewhere), some retail property owners with current or former dry cleaners have been reluctant to sell their properties for fear that the buyers’ environmental due diligence will uncover contamination. For the same reason, many retail property buyers, lenders, and brokers shy away from these properties.
Yet several viable solutions are allowing contaminated-real estate transactions to occur, giving a competitive advantage to those who consider them.
For instance, in response to the problem of groundwater contamination from dry cleaners, several states—including Arizona, Connecticut, Florida, Illinois, Kansas, Minnesota, North Carolina, Oregon, South Carolina, and Tennessee—have set up cleanup funds that are funded through a PCE tax.
In addition, in response to the need for certainty about cleanup costs, some environmental consulting firms now offer guaranteed fixed-price cleanup contracts, taking on the cleanup risk at an early stage in the groundwater investigation process.
Insurance Solutions
Environmental insurance policies have evolved over the last three years to provide viable solutions, control costs, and transfer liability. American International Group, Zurich, ECS/Reliance, United Capital, and Kemper Environmental are among the insurance companies that provide environmental policies for future releases, undiscovered contamination, third-party liability, and protection against cleanup cost overruns.
These risks usually are divided into two basic types of insurance policies: "cost cap" or "stop loss" policies cover the cleanup of known contamination, while "property transfer liability" policies cover undiscovered and future contamination.
Coverage for New Dry Cleaning Tenants.
Property owners can help protect themselves against environmental problems from new dry cleaning tenants by having the tenant obtain the proper insurance coverage.
These policies are variations of property transfer liability policies and insure the property owner (and sometimes the dry cleaner operator) against the cleanup of future releases. Policies also can include coverage of past, undiscovered contamination. Premiums for these policies typically cost $2,000 to $10,000 per year for $1 million to $2 million of coverage, with a typical deductible of $10,000 to $50,000.
In their leases, owners also should require tenants to use the latest dry cleaning equipment technology and require regular inspections by the property manager. For instance, closed-loop technology has no air emissions and produces no separator water that could be disposed of down the sewer. This type of equipment now is required by law in California and is recommended by IFI. Some environmental consulting firms and industry trade groups offer programs to help property owners use modern equipment and comply with environmental regulations.
Coverage for Undiscovered Contamination.
Buyers and lenders can obtain protection against the cost of existing but as yet undetected soil or groundwater contamination from current or former dry cleaning tenants.
Insurance companies often require more extensive soil and groundwater investigation around potential contamination sources that are identified in a phase I environmental site assessment before they provide this coverage. However, in certain instances, insurance companies have been willing to provide coverage even when no phase II investigation has been performed—although the deductible and the cost of the premium reflect this.
Premiums for these policies often cost between $4,000 and $7,000 per year for coverage of up to $5 million in cleanup costs, with a $100,000 deductible typical. These policies can be purchased for up to 10-year terms with the total premium paid up front.
Coverage for Cost Overruns for Cleanup of Known Contamination.
For known contamination problems, remediation stop loss or cost cap policies protect against cleanup cost overruns.
These policies require that an environmental consultant first evaluate the contamination and develop a remediation plan and a cost estimate. The insurance company typically adds a contingency on top of the consultant’s cost estimate to establish the self-insured retention, which is the cleanup cost amount above which the insurance company begins to pay for cost overruns. The premium for these policies often costs 5 percent to 10 percent of the coverage limit. These policies usually extend until the cleanup is complete and regulatory closure is obtained.
However, these policies may be unable to rescue real estate transactions that run afoul of contamination discovered during due diligence, because the extent of contamination usually is not defined enough for a consultant to establish a remediation plan and cost estimate.
New Cleanup Technologies
Cleanup of groundwater contaminated by dry cleaning operations also is becoming more viable, faster, and less expensive due to promising new cleanup technologies that can achieve regulatory closure in less than half the time of conventional technologies. However, these cleanups often still take up to one to three years.
Most PCE groundwater cleanups in the past involved "pump-and-treat" systems that expensively extract and treat large volumes of groundwater, which two new technologies avoid. One involves injecting a mixture that contains hydrogen peroxide into the contaminated groundwater, breaking apart the PCE molecule on contact. The main hurdle to using this technology is delivering the hydrogen peroxide and avoiding its tendency to lose its reactivity by turning into regular water and oxygen.
Enhanced Reductive Dechlorination uses bacterial cultures to "eat" the PCE solvent in the groundwater while primarily living off a diet of sugar syrup and nutrients, which are injected along with the special bacterial cultures into the contaminated groundwater.
Promise for Properties
As it becomes increasingly difficult in many tight real estate markets for buyers to find good properties for investment, insurance policies and new cleanup options may help free up many retail properties that have been hampered by groundwater contamination.