Landlords Cope With the High Cost of Asbestos : Real estate: Potential health hazards and the formidable task of cleanup are taking their toll on the value of commercial properties.

In 1978, Dr. Arthur Lorber bought a six-story office building that was within walking distance of the Santa Ana Civic Center. The physician figured that the aging structure, which was occupied primarily by county agencies, would be a good investment.

Seven years later, the agencies moved to county-owned offices. The building, whose lobby was renovated, has been mostly vacant since. Unable to attract new tenants, Lorber would like to sell but knows that it will be at a low price.

“I’m emotionally just sick of the place,” said Lorber, who lives in Encino.

There is little wonder. He estimates his loss at $70,000 a year on the empty building at 811 N. Broadway. While there are a number of problems with the property, Lorber believes that his “long tale of woe” is linked to a single culprit: asbestos.

The grayish, fibrous mineral was sprayed on the steel beams of the building for fire proofing when it was built in 1954. Now its presence is scaring off prospective tenants, brokers and lenders, Lorber said.

Asbestos was banned in 1979 for most construction uses because it can cause lung cancer and a debilitating lung ailment known as asbestosis. The U.S. Environmental Protection Agency says asbestos is dangerous only if the microscopic fibers are inhaled, after which they may be harbored in the lungs for 10 to 40 years before creating symptoms of disease.

The EPA estimates that there are 730,000 public and commercial buildings nationwide that contain potentially dangerous asbestos. While there is growing public concern over exposure to the mineral, the agency does not require--or even recommend--its removal from commercial buildings unless a structure is deteriorating.

For Lorber and other property owners, asbestos represents a perplexing problem. There is no agreement among government, scientific and industry officials on acceptable levels of exposure to asbestos. Nor is there agreement on the best abatement measures.

The lack of clear guidelines places a heavy burden on businesses. Deciding how to deal with the potential hazard raises serious questions involving financing, real estate competition, public opinion, health and safety and legal liability.

“The (real estate) industry is really getting whipsawed with conflicting statements from government agencies and there are not a lot of hard facts on either side,” complained Geoffrey Ely, executive director of the Building Owners and Managers Assn. of Greater Los Angeles.

Thousands of owners of older commercial buildings have already paid millions of dollars to remove asbestos, which was used as insulation or for fire- and soundproofing. It is found in acoustical tiles, sprayed on ceilings or steel beams, and wrapped around heating pipes.

This asbestos is being removed from commercial structures, even though the law does not require such severe measures and a recent study concludes that removal can, in fact, be a greater health hazard than leaving it alone.

The study published in last month’s Science magazine said the removal of “previously undamaged or encapsulated asbestos can lead to an increase in airborne concentrations of fibers in buildings . . . and can result in problems with safe removal and disposal.”

It also said the potential hazard depends on the type and size of the asbestos fibers released into the air and that “malignancies or functional impairment” will not occur as the result of exposure to most airborne concentrations of asbestos in buildings.

Critics of the study say it goes to extremes in discounting the danger from asbestos. “They shouldn’t be telling people, don’t worry about it,” said Christopher Gale, a partner in Asbestos Advisory Associates, a consulting firm in Redondo Beach. “Some people are still sitting back, playing ostrich and hoping it will go away.”

The removal of asbestos from a commercial building is legally required only if a structure is to be demolished. Still, most removal is undertaken as part of renovations. In 1989, 3,485 removal projects in apartments, schools, industrial and office buildings were reported to the South Coast Air Quality Management District.

Removing asbestos is a painstaking job that involves isolating the affected area with plastic draping, carefully scraping off the material, watering it down and hauling it in bags to specially designated dumps. By law, the work must be done by specially licensed contractors who take precautions to protect the health of their workers--who must wear respirators and protective clothing--and of the building’s tenants.

Removal of asbestos can be very expensive. Abatement fees can range from $12 to $30 a square foot, and overall costs can total $200 a square foot when factors such as lost income, the cost of moving tenants and reconstruction are considered. Lorber estimates that it would cost up to $600,000 to remove asbestos from his building, which represents about a third of the structure’s value.

The potential costs of asbestos removal are commonly factored into sales transactions. Owners of older properties--including some very large skyscrapers throughout the nation--have sold at substantial discounts because of asbestos.

In Los Angeles, the $620 million that Shuwa Investment Co. paid for Arco Plaza in 1986 reflected up to $35 million for an asbestos removal project that is about 40% completed in the two, 50-story office buildings, a Shuwa spokesman said. In New York, the 1988 sale of the former J. C. Penney headquarters for $322 million took into account $9 million later spent to remove asbestos from that structure, according to the broker involved.

But asbestos is often removed for reasons other than health and safety.

Public opinion is often a major factor. Many companies prefer to be rid of the asbestos--whether they see it as a danger or not--simply to avoid problems with tenants or others who may fear it as an environmental hazard.

Irvine Co. was one of the first landlords in Orange County to remove asbestos from some of its buildings. It spent $21 million in 1985 to take asbestos out of a number of its prime high-rise office buildings in Newport Center because of concern about public perception of a potential hazard, said Peter Tietz, the company’s vice president of asset management.

But protecting the value of an investment appears to outweigh public image or health and safety issues.

“I would say there is more asbestos abatement in the country to protect economic value than to protect the public health,” said Howard Spielman, president of Health Science Associates, a Los Alamitos consulting firm that advises landlords on how to deal with asbestos.

Other asbestos consultants agree.

“The thing behind the asbestos scare is the marketplace,” said Joel Moskowitz, head of the environmental practice group in the Los Angeles law offices of Gibson, Dunn & Crutcher. “People will not pay full value for buildings with asbestos.”

Moskowitz said that while laws requiring asbestos abatement in private office buildings and apartment houses are “almost non-existent,” buyers and lenders fear that more stringent regulations may be just around the corner.

“They don’t want to buy what you might call ‘regulation futures’,” he said.

Underlining this belief, Carol Coy, AQMD assistant director for enforcement, said she doubts that the recently published study on the dangers of asbestos removal will stop such undertakings by most building owners.

“I don’t think it will have a significant impact because of the overall mind-set that asbestos is a potential liability,” she said.

That is the main concern of bankers and other major lenders, such as insurance companies, who provide financing for the acquisition of commercial buildings.

Alan E. Horwitz, a partner at Kenneth Leventhal, a Los Angeles accounting firm that specializes in real estate consulting, said a recent survey by the firm revealed that “lenders generally will not lend on buildings encumbered with asbestos, and if they do they require a set-aside of the loan funds to remove it.”

“The general procedure (required by lenders) is removal rather than other abatement,” Horwitz said. “Most are less concerned about the actual (health) damage than the market damage and the potential for litigation.”

Steve Tucci, vice president and manager of the Newport Beach office of Wells Fargo Realty Finance, a mortgage banking subsidiary of Wells Fargo & Co., said that if a potential buyer of a building with asbestos came to him for financing, “we would be very hesitant.” He said his company generally sells its mortgages to life insurance companies, “and they are not interested” in such buildings.

The concern of lenders, he said, is that the ultimate cost of an asbestos cleanup--if it became necessary--might be greater than the loan itself, and the building owner could walk away from the property, leaving the lender with the liability.

Richard Ortwein, president of Koll Co.’s Southern California division, said the company “won’t buy a building that has asbestos in it because it is next to impossible to finance.”

Michael Hargrove, an industrial and commercial real estate broker with Lee & Associates in Irvine, said: “I wouldn’t buy a building unless the owner retained title to the asbestos. That’s what I would do. It sounds corny, but (asbestos) is a hot item and it is scary.”

Building owners and lenders say they are particularly frightened by the long-term liability of asbestos, even after it is removed from a building and deposited in a landfill. They worry that if it later pollutes the environment, they may be sued for damages.

David Grant, director of operations for South Coast Plaza, the regional shopping mall in Costa Mesa where an asbestos removal program has been under way for more than four years, said the mall’s owner, C. J. Segerstrom & Sons, has taken extraordinary precautions to protect the health of the abatement crew and shoppers. In addition, he said, a consultant carefully selected a dump--near Kettleman City, not far from Bakersfield--that it doesn’t expect to be targeted by the federal government for a future cleanup that Segerstrom might be required to help finance.

Increasingly, the presence of asbestos is putting older buildings at a competitive disadvantage with newer structures in attracting tenants, real estate experts said.

Some government agencies that traditionally have sought out lower-rent space in older structures are shunning them. The State of California has a policy against signing new leases for space in private buildings that have asbestos, even if the problem is being professionally managed. The state is also removing asbestos from buildings it owns.

And private businesses are becoming more skittish about leasing in buildings with asbestos. “Tenants are getting more knowledgeable. The bigger they are, the more likely they are to have a policy against renting space with asbestos in it,” said Horwitz of Kenneth Leventhal.

Tenant concerns about asbestos are being exploited, in some cases, by brokers representing newer buildings. Wayne Williamson, a broker and manager with First American Business Property in Santa Ana, said: “If a building has asbestos in it, it is where you go to call for tenants for your new projects (that don’t have asbestos).”

Commercial tenants and brokers have become more aware of asbestos as a result of recently enacted state laws that require landlords and their sales agents to notify tenants, contractors and prospective buyers if they are aware of the presence of asbestos.

While there is no law that landlords must go out of their way to learn whether their buildings contain asbestos, lenders, buyers and real estate management companies increasingly are requiring professional surveys.

Asbestos removal tends to be the most popular method of abatement for owners of top-grade high-rise office buildings who have to compete with more modern towers and have to make frequent reconfigurations of office space for their tenants, each of which presents an asbestos management challenge.

“The problem lies whenever we have to go and refurbish a space for new tenants, which is on the average of every three to five years,” said Doug Morehead, president of Optima Capital Management Inc., a Newport Beach company that manages commercial office buildings throughout California and Arizona. “If you do the work without removing the asbestos, it can add $10 to $20 a square foot to the cost of improvement.”

Paul Garity, a partner in charge of real estate consulting for Peat Marwick in Los Angeles, said that in today’s soft office market, most owners of less prestigious office buildings are “not removing asbestos unless they have to because there is great uncertainty they will lease up even if you take the asbestos out of them.”

Landlords, however, say municipal ordinances in some cities, such as Los Angeles and Glendale, that require sprinklers to be installed in the ceilings of older high-rise office buildings are forcing them to remove asbestos that they otherwise would have left alone.

Like many building managers, Morehead said he is trying to attack the asbestos one floor at a time in the 12-story Avco Center building in Westwood. He is devising a plan that he likens to “a giant checkerboard” to shift tenants from the affected floor to other space. He also says he will hire a consultant to monitor the work of the asbestos removal contractor.

“We want to do what is right,” Morehead said. “We are trying to remove (asbestos) when necessary and also do it as economically as possible.”