Assessing Business Risks & Controls Assessing Business Risks & Controls For The Financial Professional:For The Financial Professional:

Environmental RisksEnvironmental Risks

Loren J. Larson Caltha LLP, Minneapolis

OutlineOutlineOutline

• Overview of Risks & Controls• Environmental risks associated with real

estate• Environmental risk review process • Risk controls and risk management • What does “site closure” mean?

RisksRisksRisks

• Uncertainties that can impact organization from achieving its objectives

• Likelihood• Severity

• Assessing risks tied to organization's objectives

• Risks also included missed opportunities

Controls / Risk ManagementControls / Risk ManagementControls / Risk Management

• Risk management compasses organization's actions to reduce residual risks to an acceptable level

• Risk Avoidance• Risk Transfer• Controls

• Controls could be:• Firm versus soft controls• Mandatory versus discretionary

ApplyControls

AssessRisks

Liabilities Associated With Real Estate

Liabilities Associated With Liabilities Associated With Real EstateReal Estate

• Responsibility for investigation and cleanup of contaminated sites is for the “responsible party”

– Includes party actually causing the contamination and any subsequent property owners

• Since 2002, parties purchasing a property who conducted a Phase 1 Assessment prior to purchase (and did not identify issues) will not be a responsible party (“All Appropriate Inquiry”)

Lender Liability ProtectionLender Liability ProtectionLender Liability Protection

• Small Business Liability Relief and Revitalization Act in 2002 extended liability protection to lenders who acquire a contaminated property through foreclosure

• Also extended same protection to parties that acquire contaminated property by inheritance (if not previously aware of contamination)

Residual LiabilityResidual LiabilityResidual Liability

• Because the Lender is not “responsible party” does not mean site is clean; investigation and cleanup may be required

• Subsequent owner will have liability…• Affects value of the property• Affects marketability of property

SBA Environmental Procedures & Policies

SBA Environmental Procedures SBA Environmental Procedures & Policies& Policies

• For Lender, SBA guaranteed loans are risk transfer

• SBA could not meet its objectives without improved controls

• Requires a minimum level of risk assessment on each transaction

• Mandatory risk assessment and further controls based on results

All Cleanup SitesAll Cleanup SitesAll Cleanup Sites

Petroleum SitesPetroleum SitesPetroleum Sites

Superfund Excluded Petroleum Sites

Superfund Excluded Superfund Excluded Petroleum SitesPetroleum Sites

Petroleum Site LiabilityPetroleum Site LiabilityPetroleum Site Liability

• Liability for cleanup of leaking tank (LUST) sites falls to OWNER of tank

• The Lender becomes the tank Owner through foreclosure, it can be responsible for investigation & cleanup.

• Critical is to assure that all old tanks have been removed and active tanks are well maintained.

Environmental ReviewEnvironmental ReviewEnvironmental Review

Phase 1ESA

2 wks

Recognized Environmental Conditions

Recognized Environmental Recognized Environmental ConditionsConditions

1.Current Recognized Environmental Conditions

• Does not include “de minimis” conditions

2.Historical Recognized Environmental Conditions

• Mainly “closed” sites

3.Controlled Recognized Environmental Conditions

Recognized Environmental Conditions

Recognized Environmental Recognized Environmental ConditionsConditions

1.Current Recognized Environmental Conditions

• Does not include “de minimis conditions”

2.Historical Recognized Environmental Conditions

• Mainly “closed” sites

3.Controlled Recognized Environmental Conditions

Phase 2

Environmental ReviewEnvironmental ReviewEnvironmental Review

Phase 1ESA

2 wks

Phase 2LSI

4-6 wks

Environmental ReviewEnvironmental ReviewEnvironmental Review

Phase 1ESA

2 wks

Phase 2LSI

4-6 wks

Report to State Duty

Officer

Environmental ReviewEnvironmental ReviewEnvironmental Review

Phase 1ESA

2 wks

Phase 2LSI

4-6 wks

Report to State Duty

Officer

Liability Protection

Letters

Investigation/ Cleanup

Site Closure

Environmental ReviewEnvironmental ReviewEnvironmental Review

Phase 1ESA

2 wks

Phase 2LSI

4-6 wks

Report to State Duty

Officer

Liability Protection

Letters

Investigation/ Cleanup

Site Closure

7 wks

months

Liability LettersLiability LettersLiability Letters

• No Association Letter– Issued to single party; not transferable– Limits future use of the property to “proposed actions”

prepared by applicant– Requires applicant to cooperate with any investigation

and cleanup actions– Does not mean site is clean; investigation and cleanup

may be needed

• Lender No Association Letter– Simply recitation of existing State law

Closure LettersClosure LettersClosure Letters

• No Further Action – Non Petroleum– Issued to responsible party; transferable to subsequent

Owners– Means site is clean enough for intended use

• Site Closure Letter – Petroleum– Issued to tank Owner; technically not needed by

subsequent Owners– Means site is clean enough for intended use

• Multiple closure letters may be needed

What Does Closure Mean?What Does Closure Mean?What Does Closure Mean?

• Closure is always “as is – where is”• Does not mean the site is cleaned for any

future uses– Closure letter identifies future use limitations– If other use is planned, additional investigation or

cleanup may be required.

• Some contamination may remain; future redevelopment of the site may be affected

– If contamination is encountered, reporting to State and future investigation or cleanup may be required

Closed Sites - Rule of ThumbClosed Sites Closed Sites -- Rule of ThumbRule of Thumb

• If • Site has closed release sites (“historical

recognized conditions”) AND• Borrower plans to change use or expand/

redevelop the property

• Then • Make sure Borrower have addressed how residual

contamination will be handled AND• Factor in impact of contamination on property

value

New Issue – Vapor IntrusionNew Issue – Vapor Intrusion• Chemical vapors in the soil from contamination

left in-place seeps into surrounding buildings• Risk of vapor intrusion was not considered when

closing contaminated sites in the past• Since 2013, a Phase 1 ESA must include a

“desktop” screening for possible vapor issues• In Minnesota, MPCA is currently identified

approximately 1,500 closed sites which need to be reevaluated – so far four completed.

Soil Vapor Intrusion SamplingSoil Vapor Intrusion Sampling

Follow Up QuestionsFollow Up QuestionsFollow Up Questions

Loren Larsonllarson@calthacompany.com

Caltha LLPMinneapolis, Minnesota

(763) 208-6430