In the 1990s, dry cleaners became the retail tenants landlords loved to hate. And for good reason: research showed that perchloroethylene, the primary solvent used by the dry cleaning industry, was a dangerous contaminant. Though solvents used by other industries also were toxic, "perc," as it is generally labeled, had certain characteristics that made it a more serious environmental threat.

Fortunately, at the beginning of the new century, the dry cleaning industry is closer than ever to solving the contamination problem. Unfortunately, landlords and lenders remain wary, not quite believing the issue has been dealt with satisfactorily.

"The industry has cut consumption of perc by 85% in the last four years," reports Kelly Kelleher, president of Kelleher Cleaners and Laundromats Inc., an equipment supplier in Long Beach, Calif. "But a lot of landlords don't realize this, so they continue to give dry cleaners a hard time."

Dry cleaners did not begin using perc until the early 1980s, when, in an ironic twist, they were forced to do so by the U.S. Office of Safety and Health Administration. Prior to that time, dry cleaners had used a hydrocarbon-based product called stoddard. Though stoddard is relatively benign environmentally, it is extremely volatile and has a very low flash point. Stoddard had, in fact, been the primary culprit in a number of serious fires. Chlorine-based perchloroethylene, by contrast, is not especially volatile.

What OSHA did not realize was that perc has the unique ability to penetrate concrete. Moreover, when freed it quickly seeks the lowest point in its environment. As a result, the chemical rapidly descends through concrete floors into the soil and eventually into the groundwater. Once there, it flows wherever the groundwater flows.

Perc was found to cause cancer not long after it was introduced to the dry cleaning industry.

According to the International Fabricare Institute in Silver Spring, Md., no one has a clear idea of exactly how much perc was dumped into the environment or how much land was contaminated as a result. Nick Patz, president of CERES Associates, an environmental cleaning and consulting company based in Benicia, Calif., says that in the mid-'90s California estimated that 90% of dry cleaning sites in the state had dangerous levels of perc in the soils. Presumably, the figure would hold for other states as well.

Nationally, the level of contamination would likely have been much lower, says Patz, but many dry cleaners had routinely disposed of used perc by dumping it down the drain or out the back door. These haphazard disposal methods, he emphasizes, were perfectly legal. Both OSHA and individual business owners were totally unaware that the chemical posed any threat to the environment.

States did not begin regulating perc until about 10 years ago. The federal Environmental Protection Agency was somewhat slower to act. None of the laws enacted imposed outright bans on PERC. Rather, they mandated stricter controls on its use and, in some places, called for monitoring to ensure compliance. The EPA has established a threshold of 5 parts per billion as an acceptable level of perc in the soil or groundwater.

Costly cleanup While the new regulations helped stem the continued flow of perc into the groundwater, they could do nothing about existing levels of contamination. Consequently, other laws were enacted requiring the cleanup of contaminated sites when a problem was discovered, which, Patz notes, typically happens only when a property with or near a dry cleaner changes hands.

These regulations hit dry cleaners and property owners hard. So did legal suits resulting from communities' discovery of the potential threat to public health. By and large, landlords and their insurers ended up bearing the brunt of the cleanup costs. This burden led to a reluctance to lease or re-lease dry cleaners. Stringent lease requirements became commonplace.

The costs to clean up perc contamination can be considerable, Patz acknowledges. "If a dry cleaner is located where groundwater is shallow, has been in business for 10 to 15 years and has had lax housekeeping standards, it will probably cost around $100,000 to clean up the property.

If the contamination has spread unusually far, the cost will go up from there." Cleanup costs have come down and will continue to decline as new technologies are introduced, Patz adds, but the expense will remain considerable.

A landlord's nightmare Not only had leasing to dry cleaners saddled property owners with high cleanup costs and exposure to law suits, the presence of these businesses reduced the value of buildings and made them difficult to sell. Because the perc problem surfaced during the middle of a widespread real estate recession that had already driven values down, the costs were particularly hard for landlords to accept.

However, Kelleher asserts that such costs are dropping, and that property owners should take a new look at dry cleaners. "Landlords aren't dry cleaners. They don't know the issues, so they think that there aren't any solutions," she says. "In fact, there are solutions."

Overstated threat? Often overlooked is an EPA finding that the threat from perc may be exaggerated. According to material from IFI, the federal agency opted not to impose a nationwide ban on perc because data showed that discharges from the laundry industry contained, in the words of the EPA, "very small amounts of toxic pollutants" and were "not a national problem warranting national regulation."

At this point, Patz agrees, problems relating to perc stem primarily - though not entirely - from past rather than current operations. "Any dry cleaning establishment that has been in business longer than nine years almost certainly has contamination from perc," he says. "With dry cleaners that opened between '91 and about '97, it's an open question. It depends on their practices."

Dry cleaning operations that opened after '97 are not likely to have contamination problems unless the operators were careless or indifferent to public safety, Patz says, adding that his remarks regarding dry cleaners operating prior to '97 also apply to businesses that have closed.

New technologies Recent years have brought environmental improvements to the dry cleaning industry, says Kelleher. These range from the replacement of perchloroethylene with newer hydrocarbon-based solvents to the installation of advanced equipment designed to ensure that perc does not leak into the environment. The number of new options is large and growing, Kelleher reports.

She emphasizes that virtually all the advances are the result of voluntary changes made by the dry cleaning industry. Though fear of stronger controls may have played a role, Kelleher says the larger reason was dry cleaners' own concerns about endangering their communities' health. Most operators, after all, live within a few miles of their businesses and are subject to the same hazards as their neighbors. As a matter of fact, since operators must handle perc directly, they and their employees are exposed to greater hazards. It is clearly to dry cleaners' benefit to do whatever possible to reduce harm from their operations, Kelleher remarks.

At the moment, dry cleaners appear to favor improved handling of perc over replacing it, according to Kelleher. The reason is simple: perc is by far the most effective solvent on the market. "Nothing else removes stains as efficiently," she says.

In a recent article, William Fisher, CEO of IFI, lists five alternatives to perchloroethylene now in use, including solvents such as rynex/glycol ethers, carbon dioxide, methyl siloxane and various hydrocarbon compounds as well as the technique of wet-washing.

Fisher delineates the drawbacks of each. In most cases, he says, the drawbacks are primarily but not solely functional: alternative products simply do not clean as well as perc. In the case of carbon dioxide, the cost is prohibitive.

In regard to the implementation of new technologies for perc itself, according to Patz, dry cleaners have installed closed systems that do not allow the chemical to enter the environment. After use, perc is deposited in airtight containers for collection by companies certified to provide environmentally safe disposal at central sites.

In a case study by the Minnesota Technical Assistance Program at the University of Minnesota, a dry cleaner in Forest Lake, Minn. installed a closed system machine costing $49,000 (in 1992) that reduced the amount of perc used annually from 445 gallons to only 38 gallons. The amount of hazardous waste generated each year declined from 375 gallons to 240 gallons.

The study estimated the operator's annual savings at $2,246 in reduced perc costs and $593 in disposal costs. (The operator had already been employing a catch basin to prevent perc discharge into the soil and paying to have the waste removed.) Kelleher says the cost in constant dollars of new machinery has declined and the machinery has become even more efficient, resulting in greater savings.

A supplementary approach recommended by the IFI for owners of multiple dry cleaning shops is consolidation of cleaning operations at a single site in an industrial area. The institute notes that not only is it easier to monitor one site rather than several, but the move to an industrial zone eliminates both the concern of retail property owners and the expensive liability coverage demanded for location in a retail property.

Dealing with the past Regardless of the new solutios, property owners have to deal with the results of past use. While many sites have been remediated, many others remain to be dealt with. Some of the most seriously contaminated are among these, Patz notes, because they require the most expensive and complex remediation efforts.

He cites a cleanup in Stockton, Calif., that his firm is working on where perc groundwater migration has poisoned properties more than a mile away. Patz estimates the project will cost several million dollars.

Happily for property owners, remediation costs are declining. As Steven Campbell, a vice president at AMB Property Corp. in San Francisco, remarks about environmental remediation, "It can't be understated that the technology has improved dramatically and the cost has plummeted." Furthermore, he adds, the technology is advancing at an increasing rate, promising even greater cost reductions in the next few years.

Among the most significant advances, Campbell says, is the ability to simultaneously do a cleanup of soil and groundwater while the owner works to return a property to productive reuse. "This substantially reduces the time a property is held without producing income," he notes.

As an example, he describes a hypothetical case much like the one in Stockton, where perc from a dry cleaning business in a functioning shopping center has contaminated both the soil and the groundwater and a plume of perc in the groundwater has drifted off-site. Though the discovery of such an event would create liability and environmental issues, Campbell says it would not force the shopping center to close because users would not be exposed to any toxicity.

A number of new technologies are available for use while a business remains open, Patz notes. These range from microbes that effectively eat the perc molecules and in the process render them generally harmless to vacuum extraction and air-sparging, by which perc-neutralizing compounds are "spritzed" into the groundwater.

The brownfield movement The attitudes of investors toward contaminated sites have also begun to change. Not long ago, the discovery of contamination on a piece of real estate would cause investors to flee in droves. Today most investors are comfortable with modest and quantifiable levels of contamination (as long as that contamination can be remediated) and a small but growing group of savvy investors has come to recognize the hidden value of even seriously contaminated properties.

"There are numerous well-located, infill properties rendered dormant as a result of environmental issues that create very attractive development opportunities," says Bill Marino, also a vice president with AMB.

Typically, properties with environmental issues also trade at a discount. According to Hamid Moghadam, AMB president and CEO, brownfield sites actually can produce above-market returns if remediation is handled in a cost-effective manner.

He says the potential for higher-than-average returns lies behind AMB's recent decision to form a strategic alliance and partnership with AIG Global Real Estate Investment Alliance to invest $50 million in environmentally compromised properties.

Additional factors making brownfield investment more attractive today are the greater cooperation of regulatory agencies and availability of government assistance. "The regulatory climate has become very supportive of more efficient cleanup remedies, which has helped us dramatically. Many agencies are willing to become your partner in development, if you will. I can't tell you how much that has changed the economics," says AMB's Campbell.

Of particular benefit, says Marino, is the agencies' shift to a risk-based assessment with regard to contaminants. "Rather than specific thresholds and hard and fast rules, regulators look at the realistic level of risk to users and neighbors from different approaches," he says. "If a building slab or parking area that caps the soil is effective in keeping contamination away from people, you don't have to remove all the soil as you did in the past."

According to Thomas Mix, brownfields coordinator for the EPA's Region 9, which covers California, Nevada, Arizona, Hawaii, the Navajo Nation and the U.S. Trust Territories in the Pacific, the EPA will award $200,000 assessments grants to 70 communities across the United States this year. Though the agency awards the grants only to public or nonprofit entities, recipients can use the money for public or private properties.

In regard to perchloroethylene in particular, some states have established programs to help defray the cost of remediation. Illinois, for example, established a Drycleaner Environmental Response Trust Fund in '97. Using money from dry cleaning license fees, the fund provides up to $500,000 in pollution liability insurance to pay for the cleanup of soil and groundwater contamination. Florida and Massachusetts have similar funds.

Improvements in the environmental assessment process that make it possible to quantify contamination levels in advance have made a big difference in regard to insurance, Marino says. As long as it remained difficult to determine in advance what remediation would cost, insurers refused to underwrite brownfield projects. When they are able to gauge the extent of the problem and the cost of cleanup, they are amenable to underwriting the risk, he says.

The participation of AIG in the venture with AMB offers a clear sign of the shift in attitude. AIG's parent company, American International Group Inc., is one of the largest providers of development insurance in the world and has become a leader in insuring projects with contamination issues.

"AIG is the ideal strategic partner for (brownfield) investing due to its reputation for effectively insuring environmental risks, real estate knowledge and experience with opportunistic investing," says Moghadam.

Charles Crookall, a project manager with Shaw Industrial Property Services in Newport Beach, Calif., says the ability to get insurance has opened the door for his company to invest in environmentally questionable properties in Southern California.

In 1998, Shaw formed a partnership with New England-based TRC Environmental Solutions, an environmental engineering firm, to acquire and remediate contaminated industrial properties in Los Angeles. The partnership recently acquired a site in Mt. Vernon, Calif., and is evaluating an additional 230 acres of potential brownfields in the greater Los Angeles region for possible purchase.

According to Kelleher, everything is in place to allow dry cleaners to regain their status as desirable shopping center tenants. It is mostly a matter of making property owners aware of the changes in both dry cleaning and environmental cleanup technologies.

"Landlords got caught in some very expensive cleanup projects," she admits, "but now that the industry's practices have improved, cleanup costs are way down and pollution policies are available, there is no reason a landlord should not want to have a dry cleaner as a tenant."