In prep for the September edition of our Insider e-newsletter, I spent some time yesterday researching the recent bankruptcies and government-orchestrated restructuring of GM and Chrysler. Some critics are absolutely incensed that the restructuring allows the companies to just walk away from millions of dollars of environmental liability that accumulated over decades of auto manufacturing. My research raised more questions than answers in my mind. Here's what I found out:

1. Fellow commonground blogger Sean "Where's the Food" Dundon and I have both blogged on the thousands of dealerships that these firms put on the selling block (lots of Main-on-Main locations that may need some cleanup, but are in great retail locations that should appeal to investors) but...
2. The stickier issue is the other properties owned by GM and Chrysler than now need to be sold.
3. The new GM emerged from its restructuring in July, leaving 127 unwanted properties under the control of Motors Liquidation (the "old GM"), which has $1.2 billion to wind down operations and sell them to pay off creditors.
4. The sale of these properties, with environmental liabilities estimated at $530 million, will not be easy, especially in today's difficult commercial real estate market. They include 15 factories, as well as vacant land, homes, landfills, a golf course and a church.
5. Sale of the former factory sites will be particularly difficult given their sheer size (100s of acres) and environmental cleanup costs that could be prohibitively expensive.
6. Chrysler also left behind environmental problems with its old company, but the magnitude of its real estate assets does not reach the scale of GM's.
7. One 270-acre site in Massena, NY, possibly the worst polluted site left behind by GM, reportedly received thousands of tons of PCB-contaminated sludge from the dumping of hydraulic oil. The site also housed an open dump as well as millions of gallons of open waste lagoons, and its cleanup carries a $225 million price tag.
8. Environmental contamination has already stalled the sale of a former GM factory in Flint, MI (see picture below) due to uncertainties about future environmental liability.
9. Many of the large manufacturing sites with the worst contamination are in areas desperate for new economic development, tax revenue and jobs.
10. Motors Liquidation is currently in discussions with government officials about the potential to reach indemnification agreements. Those have to be some pretty difficult discussions. In response to the difficulties it's encountering selling off the Buick City site, Motors Liquidation issued a statement saying:

"We believe that the amounts allocated should be adequate to fund remediation at these sites, based in part upon estimated from nationally recognized environmental management firms we have engaged to assist us in estimating what is required. We look forward to working with key stakeholders...to arrive at mutually agreeable solutions that will expedite the remediations."

Obviously companies have gone bankrupt before, leaving behind expensive messues, but the size of environmental liabilities shed by GM is huge. Lehman last year was also a huge liquidation but as one expert said, "that company wasn't sitting on decade of auto manufacturing contamination."

These are the questions (in no particular order) that popped up during my research:

• Ultimately, who will bear the cost of cleaning up these sites? (I think it's us, the taxpayers)
• If GM and Chrysler become profitable again, will they have to re-assume environmental liability at these sites? (my guess is no)
• Who will shoulder the long-term liability for any environmental problems that surface years down the road? Motors Liquidation isn't going to be around years from now.
• Should the buyers assume liability? If so, then what incentive do they possibly have to buy these sites, especially in today's market? My guess is some foreign auto makers will buy at least some of the plants for US-based operations but what about the others?
• Will the government impose liens on these sites that could inhibit developers from buying the land? or offer guarantees/indemnities?
• If the government does not provide adequate incentives for buyers to purchase these sites, will they just sit idly by behind chain link fences with warnings posted on them?  
• Is the silver lining of all of this that forces have converged to force these contaminated sites, many of which were mothballed liabilities, back into productive reuse, spurring demand for assessments, sampling and cleanup? Not to mention tax revenues and jobs at a time when both are sorely needed?

Anyone care to weigh in? Any past experience that's could portend where this is all headed?

There's a Jersey City golf course getting a lot of attention this week. Referred to as a "graveyard of waste, petroleum tanks and abandoned warehouses that has given way to one of the most exclusive and expensive golf courses ever built," Liberty National Golf Club is the host of this week's Barclays tournament, the first stage of the PGA Tour’s FedEx Cup playoffs.

The course opened in 2006 on a New Jersey waterfront property with a long list of environmental conditions, and this project was an extremely difficult haul for developers. It started back in 1992 when Tom Kite got on board early and enthusiastically. A New York Times article quotes Kite saying, “As a piece of property, it was an awful blight on the landscape — a swath of mistreated land.” The 160-acre property, including 4,000 feet of it waterfront, was "a condemned collection of toxic waste, petroleum and garbage."

Issues related to the property's contamination nearly stalled the development effort many times in its 14-year development. It became a "political football," and the golf course vision looked at times like "it would mix in with the oil and muck as just another thing that died on the site." Not surprising, considering the site's past:

• located next to a former munitions storage facility, the site of an explosion during a sabotage by the Germans in 1916
• originally one of the largest oil refineries in the Northeast (part of the Rockefellers' Standard Oil empire)
• a dumping ground for old oil tanks from Exxon and others
• discarded oil tanks and toxic waste runoff from nearby refineries and factories left behind chromium, *** and beryllium.

After the golf course project got underway, the process of capping the contamination with a thick layer of sand, clay and silicate took three years, and even after construction began, the developer was quoted as saying, "We couldn't dig into the ground for anything," even to plant a 20-foot tree.

If you have a few minutes, take a look at the New York Times article. The pictures alone are worth it. Absolutely gorgeous views of NYC and the Statue of Liberty less than 1,000 yards away.

[NOTE: Credit goes to Adam Horowitz, colleague and Photoshop guru, for the image below.]

ADDENDUM: PGA Tour.com had a good interview w/ Tom Kite and Bob Cupp (course designer). Funny to read a golf pro discussing how environmental issues were treated...in layman's terms:

Q. Can you give us the short version of what you had to do to convert this from industrial waste?

TOM KITE: Basically when we first saw the property, it was dead flat. There was two foot of elevation change over the entire property and it arranged from elevation eight to ten.

And basically what you have to do, they won't let you move that contamination. They won't let you touch that contamination. You can't do anything with it. If you disturb it, it creates more problems than what's already there.

So the short version is, basically, you have to cover it all up, and you have to cover it up with enough material and with enough plastic to make sure that no water penetrates into that contaminated area.

So basically there is plastic that covers up basically the entire property, and then there's millions of tons of clay that have been put on this entire property at varying levels and varying depths. Some of it based on the design of the golf course. Some of it based on the amount of contamination that's there, and another plastic liner, and then the golf course on top of that. There's four feet of sand above the clay cap, and everything that you see is built in that four feet of sand.

I wouldn't want to be Sheila Blair right now. As head of the FDIC, she's in charge of dealing with how to reposition the millions and millions of dollars in commercial real estate, construction and residential loans on the books of failed banks. And, as I wrote in my blog last week, 77 banks have failed this year versus 25 last year, and the tally grows every Friday. It could easily reach several hundred banks by the end of 2010.

Finding buyers for the assets of these institutions is no easy feat. There just aren't enough buyers willing and able to jump into the water just yet. I can't say I blame them. Who wants to buy a failed bank's troubled commercial real estate loans that continue to bleed as property values freefall? Plus each time another bank fails, it just adds more loans to the pile, diminishing values further (basic supply and demand). 

As the New York Times reported today, Bair is under pressure to take "extraordinary steps" to attract buyers for these failed institutions. Such as:

• making it easier for private equity firms to buy insolvent lenders;
• enticing buyers by agreeing to share some of the potential losses from failed banks; and
• retooling one of its main financing programs to make it cheaper for bidders to buy the toxic assets of closed lenders.

Given the sheer volume of assets the FDIC's going to have to deal with, there's no golden ticket (I saw a local theatre production of Willy Wonka last night). The right answer will lie in a mix of solutions. As the old chestnut goes, you can lead a horse to water....but can the FDIC make them drink?

The market's now bracing for dozens more bank failures, especially among small- and mid-sized banks. These institutions that we pass every day driving around have made huge numbers of real estate loans that simply can't be paid back. This literally amounts to tens of billions of dollars in toxic assets that the government needs to find a home for. Test auctions for these loans are just getting underway. Who's going to buy them? And will the FDIC's new policies get investors to the trough and lure them to get in on the action?

And will they care about environmental due diligence? will they care if the properties are contaminated or potentially so? if they're located next to a gas station or dry cleaner? whether operations are in compliance with environmental regulations? or will they just take the paper for 55 cents on the dollar (the current FDIC average) and take their chances?

First we'll have to see which players emerge. Real estate investment trusts and private equity firms are the top client sectors to watch. REITs in particular are raising cash and expected to play a key role in distressed sales by other real estate investors. "REITs will experience years of benefits from purchasing properties at very low prices during the fire sale period," according to one key player. So if you're already tied in with providing environmental due diligence to REITs and private equity firms, you could be well-positioned, especially if Ms. Bair's mix of strategies start to get legs.

Community First Bank of Prineville, OR

Community National Bank of Sarasota County in Venice, FL

First State Bank in Sarasota, FL

These are the latest 3 banks to fail. The FDIC's close date is always a Friday, so given that we're at week's end, there will likely be a few more to add within a matter of hours. Nearly 100 banks have failed since January 2008, 72 so far this year (see graph below). And if Bloomberg is right, these numbers will continue to escalate.

As a bank fails, the FDIC is often appointed as receiver. Fortunately and unfortunately, the rise in bank failures has driven demand for environmental due diligence. When the FDIC receives the real property assets of a failed bank, a number of "closing support functions" need to occur. Environmental consultants are playing a role in supporting this process, like helping the FDIC classify a failed bank's outstanding loans on real property as high-risk or low-risk, and performing Phase I environmental site assessments (and even Phase IIs and Phase IIIs) before assets can be sold to healthier firms.

There are two reasons to expect bank failures--and this type of environmental due diligence--to rise. One, the FDIC is one of the few employers out there that's actively bringing on staff. Lots of staff, especially in the southeastern U.S. Second, Bloomberg's latest reports that more than 150 publicly traded banks own nonperforming loans that equal 5% or more of their holdings--the threshold that "former regulators say can wipe out a bank's equity and threaten its survival." The number of banks exceeding this level more than doubled this year (as of June), partly due to the rise in real estate loan defaults.

Among the biggest banks with high percentages of nonperforming loans are:

• Marshall & Ilsley Corp (WI)
• Synovus Financial Corp. (GA)
• Flagstar Bancorp. (MI)

Three others that have already announced that they expect to be shut are:

• Corus Bankshares Inc in Chicago
• Guaranty Financial Group Inc. in Austin
• Colonial BancGroup Inc. in Montgomery, AL

The FDIC has its own watch list, which has been growing as more consumers, builders and small businesses miss payments. When I spoke at our client briefings in Charlotte and Washington, DC in May, I mentioned that the list of problem banks stood at 305 in the first quarter. Afterwards, I got a number of requests from consultants asking for the banks in their area on the FDIC watch list. For obvious reasons, the agency does not disclose this information. Suffice to say, the number is growing, and based on what Bloomberg just reported, we're looking at further failures before things settle down.

Monday morning ADDENDUM

As I expected, more failures happened late Friday after I posted my blog, including one that bears mentioning. It's the largest failure of 2009 so far (Colonial BancGroup), and one of the most costly since IndyMac last year. Regulators quickly brokered a sale of 346 branches as well as $20 billion of deposits in AL, GA, TX and NV, to BB&T, which has emerged as what the New York Times called "one of the industry’s strongest players."

In addition to Colonial BancGroup, regulators closed four others, bringing the yearly total to 77 (accompanying graph has been updated). Others were:

• Community Bank of Nevada in Vegas
• Community Bank of Arizona in Phoenix
• Union Bank in Gilbert, AZ
• Dwelling House S&L in Pittsburgh

The number of failures could easily reach several hundred in the next 18 months as rising commercial real estate losses take their toll.

Gloating's not my style, so although this blog's about Boston, I won't mention baseball. I won't.

As it gets harder and harder for print media to compete effectively with online news sources, major cities across the U.S. are facing the very real prospect of not having a local newspaper. The Boston Globe is now out for bid, and questions are surfacing about the impact that contamination at its properties may have on the value of its headquarters and printing facility, which are assessed at $47 million and $17 million, respectively. Whether environmental due diligence factors into the deal remains to be seen.

The Globe's owners bought the site back in 1955 from General Tire & Rubber (red flag). I searched EDR's databases for this address and found out there's a 2002 institutional control on the site, which states that “the property comprises a disposal site or part of a disposal site as a result of a release of oil and/or hazardous material.” The notice also states that operating “a residence, school and/or day care center” on the polluted land is inconsistent with state guidelines. Further, if there's a change in use "additional work might be needed." There are reportedly three parties bidding on the deal, and one has offered to pay $35 million and assume $59 million in pension liabilities, but "it is not clear if potential buyers are factoring in cleanup costs or contemplating redeveloping the Globe headquarters site in the future."

Even more interesting than the news story itself, titled Pollution Cuts Globe Land's Value, are the comments it inspired. The commenters are as colorful and entertaining as rabid Red Sox fans can be (oops). Here's a smattering of some of the best:

• "The whole Blob is contaminated so it's no wonder the land on which it operates is too. It's a toxic asset and only Soros or Obama would and could bail out the unethical and immoral rag."
• "Exactly! The 'writing' has been polluted for the better part of a half century."
• "Any potential buyer of the Globe, with deep pockets, no doubt sees the real estate along Morrissey Boulevard as a prime asset. It seems improbable - if not impossible - that potential buyers would not be aware of the contaminated site. It's public record, as the Herald pointed out today. The New York Times, owner the Globe, would have to disclose the information as part of a sale, would it not? There must be some estimates of a cost cleanup for the site and that would be factored into a sale (just guessing)."
• "The irony is hysterical. Here is the Globe screaming the Lying Lefty Line about the environment, sitting on a toxic sludge pile."

I should also mention that the article appeared in the Herald, the Globe's key competition so many of the comments are in the spirit of attacking a nemesis. The editors of the Herald may have relished the opportunity to publish a story about the environmental skeletons in the Globe's closet, and of course now that this story is out there getting visibility, it's going to be that much hard for the prospective purchasers to ignore environmental issues in the due diligence conducted, as well as the purchase price negotiations.

Tip O'Neill, the late Speaker of the House, is credited with the quote "All politics is local." I'd argue that all environmental due diligence is, too. I have a new-found respect for researchers who comb through deeds and titles at local courthouses across the country after an AUL training workshop I sat in on this week. 

This morning the point was brought home again when one of my google news feeds brought me to a Brooklyn community website, Brownstoner. Amid posts about a coffee shop, installing a patio, flea and farmers markets sat an exchange by someone who is considering a property adjacent to contaminated sites, but utterly clueless about what this might mean to his own liability. He ended up getting some good intell about local sources of environmental data, the importance of due diligence and government agencies that might be able to help. Without this avenue of communication, where would he be? Probably buying a site that could cost him dearly down the road.

When I was doing client briefings this past spring about the sorry state of the market, one of the things I urged attendees was to do EVERYTHING they can to get tied into their local market. If new investors are about to come on the scene, one of the best ways to find out who they are is to put out some feelers. Local community websites like the Brownstoner are great ways to get tied in. Another I saw recently is The Real Corner, a commercial real estate site. They're setting up groups that would let you link into Indiana's market or Southern California's. It's new so there's not much there yet, but you get the idea. There are so many sites like this sprouting up across the country.

As Rob just brought up in his latest blog, changing market conditions demand changing strategies. I couldn't agree more. While the market downturn means EPs are fighting for a piece of a smaller Phase I ESA market, technological advances allow us myriad ways to get more visibility for our expertise than ever before. Usually for free.  It's worth spending a little time to find out about them, tune in and throw in your two cents when you're so inclined. They can be a great way to tie into the players in your local market. Who knows? It might just lead to your next project.

Have a great weekend, all. I'm looking forward to some great old-fashioned New England baseball (several states away from my Red Sox-loving spouse).

LUST has been getting a lot of attention in government circles recently (and I'm not referring to the latest governor's scandal involving an international tryst under the guise of hiking the Appalachian Trail).

On Saturday, the author of the Caucus blog of the New York Times wrote this tongue-in-cheek statement: "Unfortunately, LUST is just about as *** as an oil spill in your bathtub." 

What's been making headlines is that EPA was busy last month doling out the $200 million allocated to the federal LUST program under the stimulus package. Although EPA was required to obligate LUST Recovery Act resources by September 30, 2010, the agency sought to do so by a July 17, 2009 deadline in the spirit of the urgent need for job creation. So, that's accounts for the recent headlines about a million bucks to one municipality here, a few million to another municipality there. Even Guam got LUST funding to the tune of $138,000.

Also in the spirit of rapid job creation, states are now under pressure to expend their allocations quickly. If not, they risk being penalized for a "failure to perform."

And they are required to spend the money under a pretty strict set of guidelines referred to "the arrestingly titled:"

Guidance to Regions for Implementing the LUST Provision of the ARRA of 2009.

The funding can be used for "shovel-ready projects (sites ready for assessment and cleanup) that are typically orphaned or abandoned sites, where the owners/operators of the sites are unknown or unable to pay," as well as "staff management and oversight activities that will leverage additional cleanups." EPA has a lot of hoops to jump through to meet the transparency requirements of spending ARRA dollars, as outlined in its plan submitted to the Office of Management and Budget. The document also contains a list of states getting the highest allocations (California, Florida and Texas).

So, how does $200 million measure up against the LUST problem in the U.S.? Drop in the bucket.

There's a backlog of just over 100,000 leaks that have been identified but not yet cleaned up. So the $200 million would cover those provided the average cost of cleanup per leak did not exceed $2,000. Fat chance.

Instead, EPA estimates that the $200 million in LUST money in the stimulus law will pay for "at least 1,600 cleanups."  That's an average of $125,000 per cleanup.

In terms of the scope of the LUST problem, you need only look at the map I uploaded at the end of this blog. It shows LUSTs in the valley of the Phoenix metro area as mapped by the AZ Dept. of Environmental Quality, which just received $3.2 million in stimulus money. That funding should help clean up a few of these sites.

I came across some up-to-date stats on the universe of sites from an EPA June 2009 document (This summary is apparently a hot commodity. An EP who follows me on twitter said he spent a lot of time a few years ago researching LUST stats like this):

Corrective action at UST sites (as of March 2009)

• 482,166 releases have been confirmed

• 456,677 cleanups have been initiated

• 380,976 cleanups have been completed

• 101,190 cleanups have not yet been completed

So, we have 100,000+ sites to be cleaned up. And the $200M in ARRA funding will pay for 1,600 of these (assuming the funding really goes to site cleanup and not just to patch holes in state budgets).

Will there ever be a day when there are no LUSTs? Or are USTs leaking faster than we as a society can clean them up?