What You Need To Know About EPA Changes And CRE
Larry Schnapf (Environmental Attorney)
Visit Larry’s website at http://www.environmental-law.net.
Alan R. Grosheider (CEO of Blue222)
Visit Blue222.com to learn how we make nationwide due diligence as easy as ordering from Amazon!
In this podcast interview, Alan Grosheider interviews Larry Schnapf. Larry’s boutique environmental law firm has expertise in environmental issues associated with Corporate and Real Estate Transactions, Complex Commercial Financing, Environmental Due Diligence, and Brownfield Development.
President Trump signed a broad executive order that’s primarily aimed at promoting the use of coal and slowing Obama-era efforts to reduce America’s greenhouse-gas emissions.
What effect, if any, will the Trump administration have on environmental due diligence. Do you feel that the lenders may see this as a sign to worry less about thorough due diligence?
Not necessarily. Most federal laws are delegated to the states. From a practical standpoint, there won’t be a significant impact in due diligence. There may be less concern with corporate enforcement. However, it appears that the federal government will rely more on states for enforcement.
With regard to Superfund, EPA Administrator Scott Pruitt is a very strong supporter of brownfields, and there is strong support in Congress. So brownfield work likely will increase. In fact, there are two bills under consideration that would provide more liability protection for municipalities and make brownfield grants more flexible.
Brownfield funding has gradually reduced in recent years for sites with no responsible parties. However, for sites with assigned responsible parties, the projects should proceed.
So does it appear that with these changes it will become easier for a brownfield project to be approved and proceed?
The federal brownfield programs are grant programs. In addition, liability protections were developed to allow those who wanted to develop sites to be protected. Unfortunately, the courts have muddied up Bona Fide Prospective Purchaser Defense (BFPPD). The BFPPD was created to protect purchasers of real property from environmental liability, even when they knew the property was contaminated.
To achieve BFPPD was made to be fairly easy. You complete a Phase I Environmental Site Assessment, and you show no affiliation with the party responsible for contamination. However, after taking title, you have to take appropriate care. This is where courts often have ruled that the purchaser lost their BFPPD because they failed to take actions recommended in a Phase I.
To avoid this concern, a Phase I should be sufficiently thorough to allow the purchaser to know the steps required to maintain appropriate care; however, the Phase I should not list specific recommendations. Banks normally require recommendations. However, those recommendations may be the cause of the loss of BFPPD, if the purchaser does not adequately follow the recommendations. It is advisable for the consultant to send recommendations to the purchaser in a separate, private letter that is not considered part of the Phase I for the purposes of achieving BFPPD.
So to clarify BFPPD, the defense allows you to perform your Phase I due diligence, identify specific recognized environmental conditions, and complete your purchase with protection from Superfund liability. So you’re saying that if the Phase I makes specific recommendations, you’re at more risk of losing your BFPPD if you happen to miss completion of any recommendations?
Yes, after you take title, you can lose BFPPD, if you don’t take appropriate action with respect to existing contamination at the site, such as stopping ongoing releases and preventing human exposure. This is where vapor intrusion can come into play. Purchasers need to be aware of this protection to facilitate projects; however, they need to be aware that they can lose the protection, if they’re not careful.
Some EPA regional offices are listing the specific steps required to maintain BFPPD when they enter into a BFPPD agreement. Some states, like Michigan, do a great job of requiring specific steps to be identified prior to the BFPPD agreement.
So, if a property purchaser wants to utilize BFPPD to purchase a property, it is important for them to get a great consultant and great attorney, work together to complete a Phase I with no recommendations, and, if possible, nail down the specific steps required to maintain BFPPD with the regulators prior to completion of BFPPD agreements.
Yes, most of the time, you’ll work with state regulators who will require an investigation, a remedial action plan, and then provide a no further action letter. That generally will be sufficient with respect to federal Superfund protection. Everyone involved needs to be careful to understand why they are doing due diligence. For example, in New York, if seller gets a “clean” Phase to market their property, they may prevent a buyer from utilizing BFPPD to purchase the property and qualify for a cleanup grant. In New York, the brownfield program actually will pay part of your build-out costs, in addition to your cleanup costs. So, the program is very much in demand.
So, in the next 10 to 20 years, do you still see a lot of remaining brownfield opportunities out there?
I can’t predict 10 years out, but, clearly, our society is placing more and more value on urban areas, and there are a lot of contaminated urban areas. I think brownfields will continue to be a powerful economic tool for development to attract capital and opportunities.
I always felt that brownfields are opportunities that a lot of developers and lenders miss out on due to being overly cautious. However, if you have a bit of risk tolerance and the right team, brownfields can be a fantastic opportunity.
Historically, lenders and developers have been concerned with contaminated properties. The other extreme is that parties will overlook or downplay real environmental issues. I see this a lot recently with dry cleaners. People just don’t appreciate the potential for contamination from dry cleaners. For a small business, dry cleaners are like having a mini factory on your property in terms of potential contamination. Historically-closed underground storage tanks also are a huge concern because their closure often doesn’t meet today’s standards.
Often now with the tax credits offered in New York, the tables have turned. In the past, developers would argue that a site is clean, and the DEC would argue that it was contaminated. Now the developer often is arguing that the site is contaminated, and the DEC is arguing that it is not.
Is there anything coming up that due diligence consultants and attorneys should be learning about?
We have the issue of Emerging Contaminants (ECs). In New York PFOSs and PFOAs are of growing concern. They’re usually used in Teflon and also firefighting foam. People now are suddenly finding themselves with contaminants on their properties that no one ever looked for in the past.
A good Phase I requires a very good historical investigation about all the uses of the property, what tanks were there, finding past records of environmental issues and cleanup, what the proposed use will be, and if the new use require any special permitting, etc. From a legal perspective, it’s also important to determine any corporate liabilities from the past and who’s responsible. A quick review of the property and a database search doesn’t cut it. Unfortunately, lenders are pushing prices down and expecting more from consultants.
In one particular subset of lending: Commercial Mortgage Backed Securities (CMBS), it’s important for consultants who don’t know the CMBS market to realize that the investor who purchases the “B piece” is a very important consideration. This is the lesser rated portion of a portfolio. If there is a default, they will take the first hit. So they may scrutinize the environmental issues more closely.
So emerging issues include dry cleaners, ECs, historic issues that haven’t been adequately evaluated, and evaluating business risk for future property use. Phase Is are not a scientific study, it’s a combination of legal and technical. So you need consultants and legal advice from people who are practical from a business sense. You have to understand the constantly changing state laws.
Vapor intrusion also is a very important topic to understand with lots of local variations. So, you need advisors who really understand all the local nuances.
Would you like to give any final plug for your firm and services?
Well, I’ve been an environmental lawyer for 33 years now, and my practice has always been focused on the transactional side of things. So, my practice focuses on brownfields, corporate transactions, lender protections, etc. I used to work for a larger firm, but I went out on my own to better serve my clients. It’s fun, and I love what I do. I can be cost effective and provide clients with real value. My website provides a lot of free articles and information. I also have a LinkedIn group called Environmental Issues in Business Transactions where I post lots of useful information. Join the group to stay up on the latest environmental issues.
Yes, I’m a big fan of LinkedIn these days. I appreciate you coming on and helping educate some listeners and look forward to having you back on in the future as we think of other issues that would be helpful to commercial real estate and due diligence professionals.
Thank you, I’d love to come back on the podcast again, and look forward to your future LinkedIn posts and podcasts.
“Cold Funk” Kevin MacLeod (incompetech.com)
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