Landlords Cope With the High Cost of Asbestos : Real estate: The history of a Santa Ana building shows how 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 the aging structure, which was mostly occupied 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 the structure but knows 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 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 fireproofing when it was built in 1954. And its continued presence there is scaring off prospective tenants, brokers and lenders, Lorber said.

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

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

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

The removal of asbestos from commercial structures is taking place even though the law does not require such severe abatement and a recent study concludes that removal can be more of a 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 only legally required 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 an expensive and painstaking job that involves isolating the affected area in plastic draping, carefully scraping off the contaminated 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 tenants who continue to work in the building.

Removal of asbestos can be very costly, ranging from $12 to $30 a square foot for the abatement work and up to $200 a square foot after adding other factors such as lost income and the costs of moving tenants and reconstruction. Lorber estimates it would cost up to $600,000 to remove asbestos from his building--that represents about a third of the structure’s value.

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

In Los Angeles, the $620 million that Shuwa Investment Co. paid for Arco Plaza in 1986 reflected the cost of up to $35 million for the asbestos removal project now 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 the $9 million later spent to remove asbestos from that structure, according to the broker involved.

But the reason for asbestos removal often reflects concerns other than health and safety.

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

The 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 some of its prime high-rise office buildings in Newport Center because of concern about public perception of the potential hazard, said Peter Tietz, the company’s vice president of asset mangement.

But economic concerns--protecting the value of an investment--appear 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.

Those who make a living advising building owners on how to deal with asbestos 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 nonexistent,” 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 if the most recently published study on the dangers of asbestos removal would 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, that 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 manger of the Newport Beach office of Wells Fargo Realty Finance, a mortgage banking subsidiary of Wells Fargo & Co., said 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 asbestos cleanup if it becomes 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 the Koll Co.’s Southern California division, said that 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 giant regional shopping mall in Costa Mesa where an asbestos removal program has been under way 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--Kettleman near Bakersfield--that it doesn’t expect to be targeted by the federal government for a future cleanup that Segerstrom would be required to help fund.

Asbestos is putting older buildings at an increasing disadvantage with newer competitors in attracting tenants, real estate experts said.

Some government agencies which have been traditional tenants of lower-rent space in older structures now are shunning these same buildings. The state of California has a policy against entering into new leases in private buildings that have asbestos even if the problem is being professionally managed. The state is also removing asbestos from buildings it owns.

While Orange County government does not have a blanket policy prohibiting leases in buildings with asbestos, some building owners and brokers say that in reality the county avoids them.

Vince Geraghty, an agent in the County of Orange real estate division, said he personally will not put a county agency in a building with asbestos. The reason, he said, is “if you want to do minor alterations, it turns into a major abatement problem. If you want an extra electric outlet, for example, the outlet would cost $10 and the abatement could cost tens of thousands of dollars. We should just stay away from old buildings. That’s the key,” he said.

Private businesses are also 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.

One reason, say lawyers, is that employers worry that disgruntled employees may later hit them with lawsuits alleging that they were exposed to asbestos.

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 new state laws that went into effect over the last three years that require landlords and their sales agents to notify tenants, contractors and prospective buyers if they know the presence of asbestos.

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

“It is very difficult to manage a building with asbestos,” said Steve Wiegman, a former property manager for an older building in Santa Ana. “You have to give tenants notice and they panic.”

Jeff Littell, a commercial property manager based in Irvine, said he interprets the law to mean he must disclose the presence of asbestos to everyone who comes into the building, including those who make deliveries. “It is an absolute circus,” he said.

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.”

Tietz of the Irvine Co. said the company decided to remove asbestos from its elite high-rises at Newport Center as an alternative to repeatedly paying a premium for tenant renovations. “In the long run you are burning up the money one way or the other,” he noted. But he added that the company does not intend to remove asbestos from two four-story office buildings it owns near John Wayne Airport that are not the highest grade and are less frequently remodeled.

Paul Garity, a partner in charge of real estate consulting for Peat Marwick in Los Angeles, said 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 that 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 making them remove from ceiling asbestos that they otherwise would have lived with.

In Santa Ana, which contains 16 older, non-sprinkler high-rises, a sprinkler ordinance for older buildings so far has been successfully opposed by building owners. Meanwhile, the Legislature is considering a sprinkler law for older buildings that would apply statewide.

Morehead said he plans to remove asbestos while installing sprinklers in a Westwoood high-rise in part because the presence of sprinklers could increase the danger. “If they (the sprinklers) went off and washed the contaminants to the lower floors, you have really got a problem,” he said.

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 he likens to “a giant checkerboard” to shift tenants from the affected floor to other spaces. He also says he will hire a consultant to monitor the work of the asbestos removal contractor to see that it is done safely.

“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.”