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Mold and Real Estate Deals Not a Good Mix

The survey of 40 high-profile real estate developers and banking executives was undertaken to assess mold's financial impact on the real estate market. As mold and the resulting lawsuits have spread across the country, many builders and lenders are taking precautions to protect themselves from liability because of the mold exclusions written by the insurance industry in the last two years.

"This survey confirms the worst fears of major stakeholders in the real estate business — mold is costing big money," said Charles Perry, principal of EAG and a member of the Mortgage Bankers Association mold task force. "Since insurers fled the scene, liability claims have escalated and the devaluation of loan collateral has accelerated. Now lenders, who hold 80% of the risk on a standard real estate transaction, and developers, who hold the other 20%, are scrambling to mitigate risk from an environmental problem that could surpass asbestos and lead paint in its financial consequences."

In fact, when asked what kind of environmental contamination they feared the most in a real estate project, more than half (24 of 40) of those surveyed cited mold. In contrast, asbestos ranked a distant second (eight of 40), followed by mercury (two of 40), and radon (two of 40).  Seven respondents chose "all of the above."

"How has mold risen to the top of the worry list so fast?" asked Perry. "Because to date we've not been focused on preventing mold; we've only been looking at how to fix the problem. Unfortunately, there is no 'cure' for mold. It has baffled many builders and remediators with its ability to reoccur just weeks after it has been scraped or sprayed away… For the lender, if a borrower defaults and you can't guarantee clean-up on the property, it greatly compromises your ability to get your money's worth out of the investment. If commercial tenants or building managers are spending millions of dollars to remediate a mold infestation, how protected can lenders be if the mold returns in 30 days?"

Some builders have already adopted mold-resistant construction techniques such as a capillary break under the foundation, a waterproof roofing system, windows with low potential for condensation and newly developed mechanical ventilation systems. The new techniques are designed to avoid excess water buildup and reduce the likelihood of leakage.

"Lenders are also considering the requirement of mold inspections pre-, during and post-construction for new real estate loans," said Perry. "Unlike most inspections, a mold-specific (Indoor Air Quality) engineer will know where, how and when to look for it, saving the lender, the borrower and the builder thousands of dollars as well as litigation nightmares.”

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