Considering A Brownfield Site For A New Warehouse? Here’s How To Be Protected From Liability
The explosion of e-commerce during the pandemic has had a major impact on the $245B-plus global warehouse industry. Companies are in desperate need of last-mile logistics space to ensure their customers get online orders quickly, and investors are also eager to get in on the industrial boom.
Presently, there isn't enough supply to keep up with the demand. The U.S. continues to face a severe shortage of warehouse space, with a need for an additional 1B SF by 2025, according to JLL. This has forced businesses to think creatively about where and how to acquire new warehouses, with some even considering sites they would normally overlook due to potential environmental and legal concerns.
One example of such a location could be a brownfield site — a property that can be redeveloped or repurposed, but comes with a history of pollutants and contaminants. However, acquiring a brownfield site means they might be taking on more than just property. They could also be inheriting liability for pre-existing environmental contamination on the site from former industrial uses.
According to Chris Alviggi, managing director of NFP, an insurance and benefits coverage company, investors and businesses may be interested in building on these former industrial sites because of their location near transportation hubs.
“Some areas don’t have an abundance of available land on which to build warehousing,” Alviggi said. “Investors appear to be willing to take on the environmental risks that come with the property to gain access to the market.”
Alviggi said that although buyers must take steps to remediate these sites and mitigate risks themselves, the process would usually be costly and they would not receive additional protections should a worst-case scenario occur. One example would include a lawsuit from a legacy worker employed at the seller’s location, who developed an illness with origins that could be traced from their employment at the site and is not eligible to receive traditional workers’ compensation benefits.
He said that when purchasing a site, many buyers also consider buying environmental insurance to protect themselves against potential environmental liabilities down the line.
“A company wants to make sure that their reputation remains intact when they invest in an asset,” Alviggi said. “A third-party lawsuit resulting in unexpected legal defense expenses and potential indemnity payments could diminish asset profitability. Environmental insurance can provide a hedge against future environmental losses.”
Alviggi said that pollution legal liability insurance, in particular, can offer protection for buildings that pose a potential environmental danger.
Before obtaining insurance, he said, the buyer would need to commission an environmental site assessment. This is performed by a licensed third party that surveys both the site’s current condition and its history through a search of titles, past fines and other relevant information that could bring red flags to light. An attorney specializing in environmental law will then review the study.
“We need to know what we’re underwriting against,” Alviggi said. “What’s the plan there? What’s in the ground? To what extent does the site have to be remediated, and at what cost? And most importantly, are there any opportunities for indemnification from the entities that caused the contamination to exist?”
Alviggi said that while a client can do their due diligence and request additional testing, most often, the testing can only be done after the deal is closed. This holds especially true in hot real estate markets. Once the assessment is complete, a purchase agreement is finalized to clarify any legal obligations of the buyer and seller, and to indicate responsibility and indemnity for liabilities created from known or unknown contamination.
“Real estate investors should look to leverage the environmental insurance against indemnification obligations,” Alviggi said. “Doing so makes the deal between the buyer and seller go much smoother.”
Alviggi said that once the deal closes, environmental insurance can be obtained, which provides an additional layer of protection for the stakeholders. Once approvals are attained and redevelopment commences, this insurance provides a potential funding source for newly discovered contamination and third-party liabilities that arise from ownership interests.
Alviggi said that purchasers who want to protect themselves from environmental liabilities need to fully understand the site’s history and retain appropriate professionals to guide them through the acquisition process. This includes an environmental and land use legal team, an environmental and geotech engineer and an insurance professional. Working in tandem affords insurance professionals the best opportunity to craft coverage around expected remedial costs and contractually assumed liabilities.
“Anybody can sell insurance, but being a true adviser and consultant means providing value to clients and their deal team during complicated real estate transactions,” Alviggi said.
This article was produced in collaboration between NFP and Studio B. Bisnow news staff was not involved in the production of this content.
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