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COVER STORY, FEBRUARY 2005
PREVENTION IS KEY IN THE FIGHT AGAINST
MOLD
Real estate developers scramble to scrape mold off properties.
Charles Perry
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Perry
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Over the last several years, mold has crept into thousands
of commercial buildings and multifamily dwellings across the
country, causing serious concern for developers. Now, owners,
builders and mortgage lenders are beginning to realize that
mold is growing on their bottom line.
You see, perception is reality, and if the perception is that
there is mold on-site, then there are just too many other
properties out there for a developer to want to take on that
kind of complication. This is especially true in today’s
market for several reasons. First, there is no longer any
coverage for mold in commercial or multifamily property-casualty
insurance — a developer’s first line of defense
prior to the last 2 years.
Second, since that coverage is gone, that means your next
alternative for a financial solution is litigation —
which is one of the primary reasons lawsuits involving mold
and real estate are being filed at the rate of 10 or more
per day. That has been the case for the last 3 years. Who
needs litigation if you’re a developer simply seeking
to attract some retail tenants?
Third, despite a decade of environmental changes to lending
policies having to do with issues such as asbestos, lead paint
and leaking underground storage tanks, mold is a different
enemy altogether.
At least with any of those other environmental hazards, if
you removed them, you knew they were gone, and you and your
lender moved on. Unfortunately, that’s not the case with
mold; in fact, it’s not even close.
If mold is present and you pay to have a remediator remove
it, given the right climate or the unseen water-soaked area
of the building, give mold 48 hours and it’s back for
another visit. If the conditions are right next year, chances
are high for another attack in another area of the building.
Let’s add that it is in an area that you’ll not
see until it’s too late. The ugly cycle starts again.
This problem cries out for prevention. The best approach is
to stop mold before it starts.
While the scientific debate stumbles along over how mold affects
physical health, there is no doubt whatsoever that mold affects
the financial health of commercial and multifamily properties.
The effects can be so bad, in fact, that the Mortgage Bankers
Association (MBA) established a working group on mold. The
group, of which I am a member, has assembled and is due to
present its report at the MBA’s Commercial Real Estate
Finance/ Multifamily Housing Convention this month. This report
offers suggestions aimed at prevention that I think developers
should know about right away.
As a lender for 20 years and a consultant on environmental
issues concerning real estate for more than 12 years, I believe
that unless developers drastically change the way they approach
the mold problem, the worst is yet to come. Some say the days
of huge multi-million-dollar jury prizes in mold cases are
over. This may be true for bad-faith claims between individuals
and insurers, which were not really about mold in the first
place but more about bad faith. Mold liability lawsuits, however,
initiated by retail tenants, commercial employees and multifamily
residents are rising every month.
Several sources estimate the average number of mold claims
a day is now running about 10 — and that number could
easily rise to 20 per day in the near term unless we change
our building habits and our lending policies. This is especially
true for every new site that is built where a prevention approach
could really help.
Yes, we live in a litigious society, but these lawsuits have
spread across the country like, well, like mold, because insurers
in 43 states and the District of Columbia have underwritten
mold exclusions or drastic deductibles in their standard property-casualty
policies. The only other risk excluded across the board with
this kind of speed is terrorism. Why? The Insurance Information
Institute reports that carriers paid approximately $1.4 billion
in mold-related claims in the United States in 2001; in 2002,
payouts rose to $3 billion.
The liability issues in play for developers include the following:
• Damage to property caused by rot
• Damage to property caused by reputation, thereby
weakening sale price and/or buyer demand
• Bodily injury claims
• Workers’ compensation claims
Understanding Mold
The conditions under which mold occurs, according to an analysis
developed by the University of Florida, require the existence
of spores, moisture, a normal temperature range and the presence
of a food source (cellulose — as in paper). Because temperatures,
airborne spores and moisture are issues dealing with Mother
Nature, the only truly controllable variable is the food source.
The food source primarily includes products with organic content,
which account for approximately 80 percent of the surface
area of a building. Water plus organic material means mold.
As one consultant told me, “It means mold 100 percent
of the time.”
Organic products have been major factors in buildings and
construction for decades: carpets, ceiling tiles, insulation
and paper-faced wallboard. When it comes to products with
organic content, there are only two kinds: those with mold
and those that will have mold.
Property Types Where Mold is Affecting Value
Multifamily. In a recent informal MBA-member survey, respondents
were asked for which property types they were likely to request
a mold survey/assessment. Twenty-two of 24 lenders said multifamily/apartment.
The reason is simple: Imagine a homeowner such as the one
in Texas who recently won several million dollars from an
insurance company for mold damage. Now multiply that suit
by 300 tenants. That is the risk level of multifamily collateral.
If mold finds a home in the air vents, every single occupant
could be affected one way or the other.
Hospitals/healthcare centers/nursing homes. Next on the “worry
list” based on findings from the same MBA-member survey
was the healthcare sector (17 of 20 lenders). Obviously, the
last place you want to find air-quality problems is in a hospital.
The liability issues are massive because they are largely
health related.
Class-action lawsuits are engulfing borrowers. Financial pressure
is also coming in the form of workers’ compensation claims
and extended disability leaves by employees. In addition,
once mold takes hold, premiums for directors’ and officers’
insurance and commercial general liability insurance skyrocket.
Most types of coverage exclude any third-party coverage for
mold-related claims and, more importantly, insurers therefore
have no duty to defend the insureds. These factors can decimate
a borrower’s ability to make loan payments.
Hotels and other hospitality structures. Several high-profile
cases of mold in hotels have caused retail tenants to flee,
lawsuits to be filed and, in the case of one resort hotel
in Hawaii, the building to be closed just months after it
opened. Worse, the property is tainted with the mold equivalent
of yesterday’s mold problem, Legionnaires’ disease.
If the hotel reopens, occupancy rates may never recover because
of the stigma. The likelihood of a lucrative resale or refinancing
plummets. Again, the lender is exposed to 80 percent of that
risk.
Affordable housing. “Affordable” means the properties
are often buildings with lower budgets for construction and
maintenance. Because of this they are prone to mold-related
problems. These properties rank among the highest for litigation
incidents involving mold suits and large settlements. The
two major tenants of affordable housing — the elderly
and the young — are in the highest-risk category for
mold-related illnesses. Lenders cannot afford to have these
kinds of liabilities looming. If remediation is necessary,
the costs may be prohibitive. So the lender forecloses and
knocks down the building — not exactly what the lender
had in mind when it made the loan.
I have not mentioned military housing and schools, because
the majority of mortgage lenders typically are not involved
in the debt on those structures. Bondholders beware, however:
Problems in those two areas are rampant.
Developers Taking Action
Opportunities for new construction, rehabilitation, remodeling
and remediation are substantially different than what they
are for existing properties going through a renewal, refinancing
or sale as-is.
Developers have an opportunity to prevent the likelihood of
mold in the future by educating themselves on the latest developments
in mold inspections and mold-resistant building materials.
Lenders in the MBA are considering setting new guidelines
that include the required use of mold-resistant building products,
proper construction techniques and effective inspection regimes,
especially inspections that take place while the building
products lay on the ground at the very start of construction.
Developers, which have as much on the line as lenders, should
follow the same course.
Many types of mold-resistant building materials have been
developed or are currently in use — un-faced insulation,
composite panels, inorganic non-woven house wraps, mold-resistant
roofing products, tile backer, composite plastic panels and
decking, glass curtain walls and, most important, paperless
drywall.
Wallboard is the most common element of any post-1950s building;
unfortunately, the paper facing on the front and back makes
a great home for mold. Permanent mortgage lenders should require
that construction loans be contingent on the use of paperless
wallboard, which is sheathed with fiberglass rather than paper.
These kinds of building products have been developed recently
for the inside of buildings, a technology that has been universally
accepted and extremely successful for the exterior of buildings
for 20 years. To back that up, lenders should also require
pre-, during- and post-project inspections that check for
the presence of mold and mold-resistant products.
In other words, if you were to construct a building of totally
inert materials, such as fiberglass, aluminum and other man-made
inorganic materials, and you built it wisely, then you probably
would not have a mold problem. New construction offers an
opportunity for effective prevention measures unavailable
to existing buildings.
Developers have the same strong desire to protect the real
estate that lenders do. No developer wants to be in the position
where his or her financial status has been impaired.
Charles Perry Jr. is the principal and founder of the Environmental
Assurance Group of West Hartford, Connecticut.
| Four Myths about
Mold
1) If you can control moisture, you can control mold.
The fact is that humidity is here forever. If you live
in or build and finance properties in certain parts of
the country it likely will be worse, and accidents such
as broken pipes happen. We humans with our four bathrooms
and our dishwashers emit more water in a day than is caused
by poor construction. Water is a fact of life.
2) Remediation is the solution. Unfortunately, that is
not true. Once mold has become visible and able to be
remediated, it’s too late. No matter what you do,
unless you remove everything that might have caused the
problem or “scraped the ground,” as they say,
or unless you’ve moved from Texas to Minneapolis
to escape the humidity, mold likely will return.
Today’s average cost of remediating mold in a 2,000-square-foot
business is $40,000 or more, and that’s just the
first time around. In contrast to that jaw-dropping figure,
you could spend no more than a few hundred dollars on
pre-construction mold prevention on that same building
and stand a very good chance that you’ll not have
to worry about mold contamination. One builder that specializes
in $1 million to $3 million houses on the East Coast says,
“The equivalent of making these homes mold resistant
is probably the same as upgrading a sink and a light fixture
in a bathroom.”
I’m not disparaging solid mold remediators, I’m
just saying that there is a much better solution for the
future. It lies in prevention, not in remediation.
3) Inspections reveal mold. A recent informal poll of
MBA members showed that 75 percent of them performed a
mold inspection for loan purchases and 53 percent performed
a mold inspection for loan originations — which,
generally speaking, is a good thing. The bigger issue,
however, is that a recent interview with a number of remediators
showed that more than 80 percent of them believed that
a mold inspection only is productive and helpful if the
mold is visible. Beyond that, we have no standards to
judge whether the mold present is above or below a certain
standard. Imagine the complexity of attempting to set
standards for, say, 100,000 types of mold and 1 million
different types of immune system reactions — it simply
is not going to happen.
This is unfortunate, because standards would help lenders
and developers a lot. In that same poll, 25 percent of
lenders said that the lack of standards delayed loan closings.
More than 20 percent said the lack of standards caused
termination of loan applications.
4) Mold accumulates within structures over long periods
of time. Wrong. The majority of serious mold problems
start before construction begins. The way in which building
materials are stored at the warehouse, transported to
the site and stored on-site often will determine the probability
of mold damage down the line. Because of leaky storage
facilities and unsealed conditions on trucks and construction
sites, building materials are often exposed to mold spores
before a contractor puts a hammer to a nail. |
©2005 France Publications, Inc. Duplication
or reproduction of this article not permitted without authorization
from France Publications, Inc. For information on reprints
of this article contact Barbara
Sherer at (630) 554-6054.
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