Addressing Environmental Liabilities When Buying Land or Business | Caltha LLP

Addressing Environmental Liabilities When Buying Land or Business

Addressing Environmental Liabilities When Buying Land or Business

Loren Larson, Caltha LLPwww.calthacompany.comLoren Larson, Caltha LLPwww.calthacompany.com

http://www.calthacompany.com/

TopicsTopics

Understanding Buyer & Seller risks

Risk management tools

Upcoming changes to US EPA and ASTM standards for property assessments

“Rules of thumb” for realtors

Quantifying environmental liabilities

Understanding Buyer & Seller risks

Risk management tools

Upcoming changes to US EPA and ASTM standards for property assessments

“Rules of thumb” for realtors

Quantifying environmental liabilities

Due Diligence vs

Environmental Site Assessment

Due Diligence vs

Environmental Site Assessment

EnvironmentalSite

Assessment

EnvironmentalDue

Diligence

What are the environmental liabilities?

What are the environmental liabilities?

It depends on what is being sold…It depends on what is being sold…

Real estate (land) only Real estate (land) only

Real estate + assets Real estate + assets

Real estate + assets + liabilities “the business”

Real estate + assets + liabilities “the business”

Property vs. business environmental liabilities Property vs. business

environmental liabilitiesProperty

On-site contamination

Adjacent-site contamination

Property



Business



Use restrictions

Off-site waste disposal (Superfund)

All required permits

Regulatory compliance

Capital of pollution control equipment

Product waste liabilities

Closed facilities

Ancillary facilities (warehouses, logistics facilities, etc)

Worker exposure (chemicals, asbestos, lead paint, etc.)

Business



Use restrictions






Closed facilities



Potential consequencesPotential consequencesProperty

Cost to remediate

Reduction in property value

Reduction in marketability

Property use restrictions

Civil suits

Property

Cost to remediate




Civil suits

Business

Cost to remediate




Civil suits

Fines/Penalties/Consent orders

Cost to upgrade equipment

RP reimbursement demands

Worker claims

Increased overhead costs

Business

Cost to remediate




Civil suits

Fines/Penalties/Consent orders

Cost to upgrade equipment

RP reimbursement demands

Worker claims

Increased overhead costs

Why are we concerned?Why are we concerned?

CERCLA (Superfund)Federal law that can require current landowner

to bear full burden of costs to remediate (clean up) site, even if contamination was caused by a previous landowner.

Also includes all past contributors to a contamination issue at another location.

CERCLA (Superfund)Federal law that can require current landowner

to bear full burden of costs to remediate (clean up) site, even if contamination was caused by a previous landowner.

Also includes all past contributors to a contamination issue at another location.

Evolution of Environmental Risk Management Evolution of Environmental Risk Management

Tools to manage property liabilities

Tools to manage property liabilities

Insurance coverage

Purchase agreements/escrow

Release from liability issued by agency

Avoidance

Management

Insurance coverage

Purchase agreements/escrow

Release from liability issued by agency

Avoidance

Management

Release from liability through agency




Required an ASTM Phase 1

Required recent sampling data demonstrating impacts had occurred

Required a commitment to cooperate with agency in future clean up

“Covent Not To Sue” issued by State

based on existing information and conditions

property use restriction

Required an ASTM Phase 1

Required recent sampling data demonstrating impacts had occurred

Required a commitment to cooperate with agency in future clean up

“Covent Not To Sue” issued by State

based on existing information and conditions

property use restriction

Limits on property useLimits on property use

Soil contaminationSoil contamination

Exposure and risks managedExposure and risks managed

Cleansoil

Residual liabilityResidual liability

Contamination identified on title

Contamination stigma


If area is disturbed, then

Sampling/risk reevaluation

Reassessment by agency

Costs to remediate to new conditions

Contamination identified on title

Contamination stigma


If area is disturbed, then

Sampling/risk reevaluation

Reassessment by agency

Costs to remediate to new conditions

Avoidance ProcessAvoidance Process

1. Establish risk tolerance criteria & threshold

2. Assess site relative to criteria3. Determine if threshold is exceeded4. Accept/decline

1. Establish risk tolerance criteria & threshold

2. Assess site relative to criteria3. Determine if threshold is exceeded4. Accept/decline

Management ProcessManagement Process

1. Establish risk tolerance criteria & thresholds for management

2. Assess sites relative to criteria3. Determine if, and what, threshold is

exceeded 4. Respond

1. Establish risk tolerance criteria & thresholds for management

2. Assess sites relative to criteria3. Determine if, and what, threshold is

exceeded4. Respond

Evolution of ESAsEvolution of ESAs

Very littleUse Of

ESAs

Up toMid-1990s

ASTMPhase 1

ESA-revised-

ASTMTransaction

Screen-revised-

1996 2000 2005

TransactionScreen

ASTMPhase 1

ESA-revised-

Decreaseduse

Increaseduse

& lessadherence to ASTM

ASTMPhase 1

ESA-new-

ASTMTransaction

Screen-new-

Phase 1 ESAPhase 1 ESA

Standard approach to assessments

Assure completeness

Assure quality

ASTM standard accepted by agencies for regulatory purposes

Required by most banks when loans exceed specified thresholds

Standard approach to assessments

Assure completeness

Assure quality

ASTM standard accepted by agencies for regulatory purposes

Required by most banks when loans exceed specified thresholds


Purpose:“ …assemble information about

Recognized Environmental Conditions or business-related environmental risks in connection with the Subject Property or other neighboring properties.

Purpose:“ …assemble information about

Recognized Environmental Conditions or business-related environmental risks in connection with the Subject Property or other neighboring properties.


Recognized Environmental Conditions:“ … the presence or likely presence of any

hazardous substance or petroleum products on the property under conditions that indicate an existing, past or material threat of release.”

“… The term does not include de minimis conditions that generally do not represent a material risk of harm to public health or the environment and would generally not be subject to enforcement action. “

Recognized Environmental Conditions:“ … the presence or likely presence of any

hazardous substance or petroleum products on the property under conditions that indicate an existing, past or material threat of release.”

“… The term does not include de minimis conditions that generally do not represent a material risk of harm to public health or the environment and would generally not be subject to enforcement action. “





Property



Business



Use restrictions






Closed facilities



Business



Use restrictions






Closed facilities







Property



Business



Use restrictions






Closed facilities



Business



Use restrictions






Closed facilities



EnvironmentalSite

Assessment

EnvironmentalDue

Diligence





Property



Business



Use restrictions






Closed facilities



Business



Use restrictions






Closed facilities



EnvironmentalSite

Assessment

EnvironmentalDue

Diligence

Environmental-related business risks

Environmental-related business risks

• Buyers & Sellers have different • Objectives• Risk tolerances• Needs for information

• Each ESA must identify “User”

• ESA for Buyer may look different than ESA for Seller, although both use the same information and both meet the ASTM standard

• Buyers & Sellers have different • Objectives• Risk tolerances• Needs for information

• Each ESA must identify “User”

• ESA for Buyer may look different than ESA for Seller, although both use the same information and both meet the ASTM standard

Upcoming Changes to Standard for Conducting an ESA Upcoming Changes to Standard for Conducting an ESA

“All Appropriate Inquiry”“All Appropriate Inquiry”

Basis:Potentially Responsible Parties (PRPs)

may be released from future liabilities at a CECLA (Superfund) site, if prior to purchasing property, all appropriate inquiry was conducted to identify contamination and no such conditions were found or suspected.

Basis:Potentially Responsible Parties (PRPs)

may be released from future liabilities at a CECLA (Superfund) site, if prior to purchasing property, all appropriate inquiry was conducted to identify contamination and no such conditions were found or suspected.

“All Appropriate Inquiry”“All Appropriate Inquiry”

“All appropriate inquiry” was not defined

Interim policy was:AAI = Phase 1 ESA meeting ASTM E 1597-00 or

Transaction Screen meeting ASTM E 1598-00

Draft final policy proposed in August 2004

Final due mid- to late-2005

ASTM will then reissue standard to meet USEPA requirements

“All appropriate inquiry” was not defined

Interim policy was:AAI = Phase 1 ESA meeting ASTM E 1597-00 or

Transaction Screen meeting ASTM E 1598-00

Draft final policy proposed in August 2004

Final due mid- to late-2005

ASTM will then reissue standard to meet USEPA requirements

Highlights to USEPA Proposed Requirements

Highlights to USEPA Proposed Requirements

Transaction screens will no longer met requirements for “all appropriate inquiry”

Transaction screens will no longer met requirements for “all appropriate inquiry”

Evolution of ESAsEvolution of ESAs

Very littleUse Of

ESAs

Up toMid-1990s

ASTMPhase 1

ESA-revised-

ASTMTransaction

Screen-revised-

1996 2000 2005

TransactionScreen

ASTMPhase 1

ESA-revised-

Decreaseduse

Increaseduse

& lessadherence to ASTM

ASTMPhase 1

ESA-new-

ASTMTransaction

Screen-new-

Who can conduct an ESA?Who can conduct an ESA?

2000 Standard

“person possessing sufficient training and experience…”

Proposed 2004 Standard

Must be conducted by a qualified environmental professional

BA/BS + 10 yrs relevant experience

PE/PG + 3 yrs relevant experience

2000 Standard

“person possessing sufficient training and experience…”


Must be conducted by a qualified environmental professional

BA/BS + 10 yrs relevant experience

PE/PG + 3 yrs relevant experience

Can previous ESA be used?Can previous ESA be used?

Information in previous ESAs can be used

If older than 180 days, an updated database search, interviews and site visit should obtained

All required items under the new standard will need to be addressed

Information in previous ESAs can be used

If older than 180 days, an updated database search, interviews and site visit should obtained

All required items under the new standard will need to be addressed

Who needs to be interviewed?Who needs to be interviewed?

2000 Standard

Current key site manager

Current OccupantProposed 2004 Standard

Current and past facility managers

Current and past Owners

Current and past Occupants (if different)

Employees of current and past Occupants

Adjacent landowners (for abandoned properties

2000 Standard

Current key site manager

Current OccupantProposed 2004 Standard

Current and past facility managers

Current and past Owners

Current and past Occupants (if different)

Employees of current and past Occupants

Adjacent landowners (for abandoned properties

Who needs to be interviewed?Who needs to be interviewed?

Issues

Finding past facility managers, occupants and employees

Confidential transactions

Identifying and contacting neighbors

Issues

Finding past facility managers, occupants and employees

Confidential transactions

Identifying and contacting neighbors

What historic records need to be reviewed?

What historic records need to be reviewed?

2000 Standard

USER must search environmental liens or land use limitations


Requires Preparer review of title records to confirm absence of environmental liens and use restrictions

2000 Standard

USER must search environmental liens or land use limitations


Requires Preparer review of title records to confirm absence of environmental liens and use restrictions

Property ValueProperty Value

2000 Standard

Requires USER to evaluate difference between purchase price and price of comparable properties


Preparer must evaluate fair market value if property were not contaminated

2000 Standard

Requires USER to evaluate difference between purchase price and price of comparable properties


Preparer must evaluate fair market value if property were not contaminated


§ 312.29 The relationship of the purchase price to the value of the property, if the property was not contaminated. (a) Persons … must consider whether the purchase price of the subject property reasonably reflects the fair market value of the property, if the property were not contaminated. (b) Persons who conclude that the purchase price of the subject property does not reasonably reflect the fair market value of that property, if the property were not contaminated, should consider whether or not the differential in purchase price and fair market value is due to the presence of releases or threatened releases of hazardous substances.

§ 312.29 The relationship of the purchase price to the value of the property, if the property was not contaminated.(a) Persons … must consider whether the purchase price of the subject property reasonably reflects the fair market value of the property, if the property were not contaminated. (b) Persons who conclude that the purchase price of the subject property does not reasonably reflect the fair market value of that property, if the property were not contaminated, should consider whether or not the differential in purchase price and fair market value is due to the presence of releases or threatened releases of hazardous substances.


Issues

How ESA tied to property appraisal?

Phase 1 ESA does not determine that contamination exists

Cost of remediation should be less than the differential between current price and fair market value

Phase 1 ESA generally precedes determination of purchase price

Issues

How ESA tied to property appraisal?

Phase 1 ESA does not determine that contamination exists

Cost of remediation should be less than the differential between current price and fair market value

Phase 1 ESA generally precedes determination of purchase price

ESA “Rules of Thumb” for realtors ESA “Rules of Thumb” for realtors

ESA – Rules of ThumbESA – Rules of Thumb

Representing Seller1. Anticipate environmental review

Stay in control

Address all foreseeable issues

Consider residual liabilities2. Compile information on environmental

permits, past agency inspections, other data

3. “Guide” interpretation

Representing Seller1. Anticipate environmental review

Stay in control

Address all foreseeable issues

Consider residual liabilities2. Compile information on environmental

permits, past agency inspections, other data

3. “Guide” interpretation


4. Brief facility management prior to allowing interviews

5. Conduct walk-through to identify potential issues

6. Clean-up!

4. Brief facility management prior to allowing interviews

5. Conduct walk-through to identify potential issues

6. Clean-up!


Representing Buyer1. Review and confirm Seller’s

information 2. Understand Buyer’s future plans in

relation to any use restrictions 3. Keep liabilities in perspective

Future plans

Incremental cost impacts

Representing Buyer1. Review and confirm Seller’s

information2. Understand Buyer’s future plans in

relation to any use restrictions3. Keep liabilities in perspective

Future plans

Incremental cost impacts


4. Separate site risks from inherent business risks

Focus on comparison of risk management programs

5. Approach environmental compliance audits carefully

Non-compliance issues can be identified at any operation

Focus on non-compliance issues that could result in significant costs.

4. Separate site risks from inherent business risks

Focus on comparison of risk management programs

5. Approach environmental compliance audits carefully

Non-compliance issues can be identified at any operation

Focus on non-compliance issues that could result in significant costs.


6. Promote a risk management approach, compared to risk avoidance

7. If price adjustment is required, limit potential costs to defined conditions.

6. Promote a risk management approach, compared to risk avoidance

7. If price adjustment is required, limit potential costs to defined conditions.

Estimating Environmental Liabilities Estimating Environmental Liabilities

Estimating LiabilitiesEstimating Liabilities

Projecting the range and likelihood of future costs for reasonable potential outcomes based on available site information

Not a cost estimate

Refined based on further information

Foundation for risk management

Projecting the range and likelihood of future costs for reasonable potential outcomes based on available site information

Not a cost estimate

Refined based on further information

Foundation for risk management

Estimating LiabilitiesEstimating Liabilities

Multi-level analysis based on known or suspected environmental issues

Does not include unknown or undisclosed issues

Multi-level analysis based on known or suspected environmental issues

Does not include unknown or undisclosed issues

Liability conceptsLiability concepts

Two sources of uncertainty

1. Likelihood of incurring future costs for any issue

2. Range of potential costs, if costs are incurred

Two sources of uncertainty

1. Likelihood of incurring future costs for any issue

2. Range of potential costs, if costs are incurred

Liability conceptsLiability concepts

Pure liabilityTotal liability estimate, assuming costs

are incurred for all issues

Weighted liabilityTotal liability estimate, incorporating the

likelihood of incurred future costs for each issue

Pure liabilityTotal liability estimate, assuming costs

are incurred for all issues

Weighted liabilityTotal liability estimate, incorporating the

likelihood of incurred future costs for each issue

Liability conceptLiability concept

Scenario:

Potential cost = $100 KLikelihood = 10%

Outcome 1 = $0, 90% likely

Outcome 2 = $100,00010% likely

Simple liability estimate:$100K x 0.1 = $10K liability

Scenario:

Potential cost = $100 KLikelihood = 10%

Outcome 1 = $0, 90% likely

Outcome 2 = $100,00010% likely

Simple liability estimate:$100K x 0.1 = $10K liability

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

Outcome1

Outcome2

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

Outcome1

Outcome2

ExampleExample

5% chance that car will need repair next month

Repair cost $500-3,000

1% chance that car will need to be replaced next month

Replacement cost $25,000 - $50,000

5% chance that car will need repair next month

Repair cost $500-3,000

1% chance that car will need to be replaced next month

Replacement cost $25,000 - $50,000

ExampleExample

Pure liability= $500 to $50,000

Weighted liabilityNo cost – 94% likely

(500 to 3,000) x 0.05 +(25,000 to 50,000) X 0.01

= $275 to $650/month= $3,300 to 7,800/year

Pure liability= $500 to $50,000

Weighted liabilityNo cost – 94% likely

(500 to 3,000) x 0.05 +(25,000 to 50,000) X 0.01

= $275 to $650/month= $3,300 to 7,800/year

Environmental liabilityEnvironmental liability

USTTankTank

removedremoved&&

samplingsampling

LUST

No evidence of leaks No evidence of leaks -- donedone

SiteSiteInvest.Invest.

RemoveRemoveimpactedimpacted

soilsoil

No groundwaterNo groundwaterimpacts impacts -- donedone

GWGWInvest.Invest.

GWGWremediationremediation


IssueIssue Chance of Chance of incurring costincurring cost

Cost rangeCost range LiabilityLiability

Remove and sample Remove and sample USTUST

100%100% $5,000 $5,000 –– 10,00010,000 $5,000$5,000--10,00010,000

Investigate LUSTInvestigate LUST 50%50% $5,000 $5,000 –– 7,5007,500 $2,500 $2,500 –– 3,7503,750

Remove impacted Remove impacted soilssoils

50%50% 2,000 2,000 –– 10,00010,000 $1,000 $1,000 –– 5,0005,000

Investigate Investigate groundwater impactsgroundwater impacts

20%20% $15,000 $15,000 –– 30,00030,000 $3,000 $3,000 –– 6,0006,000

Groundwater Groundwater remediationremediation

10%10% $50,000 $50,000 --150,000150,000 5,000 5,000 –– 15,00015,000

Weighted LiabilityWeighted Liability

Pure LiabilityPure Liability

$16,500 $16,500 –– 39,75039,750

$77,000 $77,000 –– 207,500207,500





Property



Business



Use restrictions






Closed facilities



Business



Use restrictions






Closed facilities




Issue 1Issue 1

Issue 2Issue 2

Issue 3Issue 3

Issue 4Issue 4

Issue 5Issue 5

Issue 6Issue 6

$

$Total Environmental

Liabilities

Communicating financial risksCommunicating financial risks

Reverse Cumulative

$

Mean = $2,779,867.000

.250

.500

.750

1.000

0

10000

$1,065,711 $2,108,078 $3,150,445 $4,192,812 $5,235,179

10,000 Trials 9,842 Displayed

Forecast: Yr-1 Total

Costs lower than… Chance

$1,020,000$1,020,000 0%0%

$2,100,000$2,100,000 25%25%

2,600,0002,600,000 50%50%

$3,300,000$3,300,000 75%75%

4,600,0004,600,000 95%95%

Key pointsKey points

SELLER should anticipate and address potential issues

Consider ESA report a sales tool

SELLER should remain in control of assessments, to the extent possible

If issues exist that require agency action, allow at least 2-months

SELLER should anticipate and address potential issues

Consider ESA report a sales tool

SELLER should remain in control of assessments, to the extent possible

If issues exist that require agency action, allow at least 2-months


BUYER should review and consider SELLER’S environmental documents

Do they meet ASTM requirements?

Do they reflect my data needs?

Do they address my business risks?

Do I need to conduct further due diligence?

BUYER should segregate site risks from inherent business risk

What is unique about this property that extends my risks

BUYER should review and consider SELLER’S environmental documents

Do they meet ASTM requirements?

Do they reflect my data needs?

Do they address my business risks?

Do I need to conduct further due diligence?

BUYER should segregate site risks from inherent business risk

What is unique about this property that extends my risks


BUYER should understand the “value” of further information

Up front costs prior to purchase decision

Agreements with agencies prior to taking title

Flaws and risks can be identified at any site

What is important?

What will I accept?

What do I need/want to fix?

Does the property meet BUYER’S future plans and requirements?

BUYER should understand the “value” of further information

Up front costs prior to purchase decision

Agreements with agencies prior to taking title

Flaws and risks can be identified at any site

What is important?

What will I accept?

What do I need/want to fix?

Does the property meet BUYER’S future plans and requirements?

QuestionsQuestions

Loren LarsonCaltha LLP

[email protected]

Loren LarsonCaltha LLP

[email protected]

http://www.calthacompany.com/

mailto:[email protected]

Date post:	15-Apr-2017
Category:	Real Estate
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