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Consultants that have municipalities as clients - tell them they are strictly liable under CERCLA and more importantly - state and local laws for environmental contamination.
Adobe Lumber Inc.vs. Hellman et al. (2009) a property owner purchased a shopping center in CA only to find that the "Suite K" which contained a dry cleaner dumped its contamination down a drain connected to the city's sewer pipes (system). The sewer pipes leaked causing further contamination. CT: Held City strictly liable.
The city proclaimed it was an innocent landowner (the so-called panacea of Phase I ASTM AAI). In denying their status as an innocent landowner, the U.S. Federal District Court (E.District CA) cited intera alia Carson Harbor Village v. Unocal Corp., 270 F.3d 863 (2001) stating, "Commentators have written the obituary for the innocent landowner defense many times since it was created in 1986 - further citing Rosemary J. Beless, "Superfund's Innocent Landowner Defense: Guilty Until Proven Innocent", 17 J, Land Resources & Envtl. 247 (1997); Shane Claonton, Passive Disposal of the Innocent Landowner Defense, 9 J. Nat. Resources Envt. L. 255 (1993-1994); L. Jager Smith, Jr., Note, CERCLA's Innocent Landowner Defense: Oasis or Mirage?", 18 Colum. J. Envtl. L. 155 (1993).
See also case law U.S. vs. 150 Acres of Land, 240 F.3d 704 (6th Cir.2000).
Phase Is and CERCAL AAI are not relevant in reality.
Lowell, MA. The Grand Manor Condominium complex was built over a city dump around 1983 and now considered an "imminent hazard" by the DEP. However, the fact that the site was built over a city dump was not discovered until November 2008 when the condo association hired a contractor to install a new drainage system. Testing of the excavated dirt from the project revealed elevated levels of ***, cadmium, lead and tetrachloroethene.
Liable parties: The DEP says: The Condo owners and the City of Lowell. The developer has passed and it is unknown whether he knew it was a dump at the time (does it matter?). The City is denying liability at the present. So who pays for the cleanup? Each individual condo owner right now. I live in a condo - and I looked at one down the road and quickly found out it had an assessment due to petroleum contamination leaking into the harbor. I passed on that condo.
Condo owners - state they cannot sell their condos and renters have left breaking their leases. One condo onwer stated: "No bank would give anyone who wanted to buy one a mortgage." He is right.
Property valuation in 2009 = $5,891,300. Today = $3,123,600.
Condo president quickly found numerous newspaper articles on the city dating back to the 1950s stating the site was a city dump. How could this happen? How was the due diligence on this site missed?
And yes - environmental insurance could have been purchased and would be covering the Condo Association - so each individual (like you and me) would not be out-of-pocket on the cleanup. I can assure you their current policy excludes pollution.
However, this is not about insurance - it's about the fact that at any time, any place - this could happen to you or me! Pollution knows no boundaries.
TRC appears to be handling the cleanup. How do you consult an individual when you are at the site and they ask - how could this happen? Who is going to pay for this?
Highlights from the Conference: Keynote Speaker - Curt Spalding, EPA Region 1 Administrator: National and regional focuses of the EPA.
EPA Nationally: (1) Enforcement and Compliance, (2) Clear Air Act (Climate Change), (3) Clean Water Act - stormwater!, (4) CERCLA, (5) Environmental Justice and (5) Smart Growth.
EPA Region 1 (New England): much broader 'agenda' including: Wet Weather Pollution, Green Jobs, Lead Poisoning, Enforcement.
MA DEP indicated their Priorities are: (1) Compliance Assessment (i.e. UST compliance), (2) Verification of Compliance (i.e. audits of 'closed sites'), (3) Maintaining Healthy Environment (i.e. diesel emission from idling buses), (4) "Blitz" - High Intensive Inspection/Enforcement: Chapter 91 Enforcement - with the reduction in staff either you work with the DEP or they leverage outside sources - e.g. the Attorney General's office for enforce regulations, (5) Leveraging Outside Agencies for assistance with Enforcement.
- MA DEP about inspections (7,400 in 2009) and enforcements (3,500 in 2009). Total penalties in MA = $6.9M vs $5.4M in 2008. Focus on really cracking down on asbestos abatement contractors! Criminal violators were prosecuted and likely to see jail time;
- DEP referenced M.G.L. c 148 section 38J - residential ASTs and encouragement of insurance coverage;
- Some interesting case law referenced about arranger liability under CERCLA and other case law like Commonwealth v. Pan Am Railways - minor spill ($100,000 cleanup) of oil but a failure to report it lead to the highest fines possible under the law ($500,000 total fines $125,000 per violation);
- Case law on environmental contractors (LSP case) - to follow.
For those in the greater 'southern New England/NYC' area - Foxwoods (Ledger, CT) is hosting a day long Mortgage Expo: "Expo in the Sun."
Among the noteworthy Agenda meetings:
9-10:45am: "504 Basics: Getting the CRE Loan Made"
1:15-2:00: "Finding the Money: CRE Financing"
Some noteworthy speakers: Presidents of Salem Five Bank, Liberty Bank; SVP of Charter Oak Federal Credit Union and more cre (and residential) mortgage leaders and other providers.
As reported in Commercial Mortgage Alert (CMA, 12/18/09) - Envirofinance Group of Sacramento has raised $50 million of private equity to do just that - purchase distressed loans with brownfield issues. Envirofinance is the "outgrowth" of CERF; a company originally founded by the director of the Massachusetts Brownfield Redevelopment to Capital. Environfinance is backed by a big equity player - Snow Phipps of NYC.
Valuations of such loans/land is challenging for numerous reasons; one of the biggest is the fact that the secondary market is in a log jam. However, another is: what is the value of a distressed loan that also happens to be a brownfield?
Several investors suggest such loans/properties are only worth 5-15 cents on the dollar. CMA reports that Envirofinance is looking for a 25-30% return targeting loans between $5MM and $25MM. That is an unheard of return in any market, let alone a in recession (sign me up)!
Benjamin Leslie-Bole of ERM summer 2009 newsletter, "How I See it: The State of the Brownfield Industry", inter alia, subscribes to a common theme from me involving environmental risk. Namely, "creative solutions" and a "totality of the circumstances" approach to such transactions are essential. Stakeholder involvement is critical and one cannot look with tunnel vision at a particular environmental issue to be a successful seller/buyer, lender or equity stakeholder of a loan/property with environmental challenges. You have to look at the big picture. See OWS discussion! In fact, such an approach by a consultant should make you stand out in a competitive marketplace.
Given the disastrous outcome of property values plummeting - wouldn't a specialty appraisal group for such loans/properties (brownfieldS) be invaluable to the FDIC and equity players like Envirofinance?
In other words - wouldn't this be a great source of NEW BUSINESS for consultants?
I should have been a weatherman. In college I sincerely considered it - even taking a class called "the weather." Everyone mocked me.
The Boston area forcast as of today (12/18/09):
Sunday, December 20. Scenario 1: Cloudy, temps in 30s. Scenario 2: Two foot blizzard w 50 mph winds ... huh ...
That's a pretty good range cloudy; or a major blizzard.
Ok votes: How many say cloudy? How many say blizzard? Flurries? Partly Cloudy?
My prediction (100% Guaranteed): the Boston area media goes nuts for the next couple days (purely for ratings), people crowd the grocery stores like its the end of the world; and the storm goes out to sea ...
"Everybody talks about the weather, but nobody does anything about it." Mark T.
Despite myself - I have a real REC story that I sincerely welcome any and all input on.
Short version: A Massachusetts SBA borrower has a 2005 Phase I that said pesticides in soil is a REC. The property is a greenhouse and the new (purchasing) borrower's business will be to use the greenhouses but will not use or store new pesticides. What should the borrower do?
In MA pesticides in soil are arguably not regulated under the MCP ("Mass. CERCLA") - so a "totality of the circumstances" approach would say - in conducting a new Phase I - does that have any impact on your determination "to REC or not to REC?" So are you considering state law in your evaluation?
The reality (I was told this) is the CDC wants to get the deal done. SBA SOP's environmental policy states that when there is a REC - then something more needs to be done. There will be consultants that support that this is not a REC and then the borrower/lender go on the way to closing the loan. Others will not.
I realize there are 1,000 different factual scenarios that could impact the decision - i.e. how close to a drinking source, storm water runoff, how much contamination, etc., etc. Let's just keep it simple and say there are (low - maybe some level of concern) levels of pesticides in the soil and the small business owner just wants to make a living running a greenhouse with no more use of new pesticides at the property. A REC could possibly RECk his loan ...
Go get them ... (thanks).
Ed
To state the obvious - lending is not what it was in 2007. For comparison in 2007 CMBS issuance hit a record of $222 Billion (with a 'b'). In 2009 it is at $800 million (with a 'm').
The Urban Land Institute and PricewaterhouseCoopers issued their joint report: "Emerging Trends in Real Estate" for 2010. They interviewed over 900 commercial real estate professionals and the consensus is not pretty (on a nationwide basis).
However, commercial lending - and new developments are getting done! Thankfully under more stringent review from regulators and, ahem, rating agencies; and certainly institutional investors.
The Boston Business Journal (December 4-10 issue) has several articles on lending and development in the greater Boston area (obviously a microcosm of the national cre industry). On the lending front two articles detail that in Masschusetts cre lending has actually increased: "Mass Lenders stay cautious focus on bad-loan reserves" and "Glimmer of Hope: Despite troubled RE market, multi-family interest surges".
In my meetings with two lenders yesterday - they mirrored what these articles indicate. Lending is getting done on commercial real estate. Based on the BBJ article and FDIC data, "Net cre loans for a group of 100 banks increased 9%." One major property focus is multifamily (across the country - not just Boston). Lenders are seeking to lend on multifamily projects and in fact, Brookline's Dexter Park deal worth $129.5 million is the biggest multifamily deal in the country! (2009)
Boston development (where they are not making any more land) is also happening. BBJ has several articles on Boston developments: "Developers find ways to adapt to flaccid market" and "Education, health sectors see projects break ground." While construction is happening - the articles indicate it is down 33% from last year in the Boston area and 24% for New England. However, one cre expert, Robert Murray, chief economist with McGraw-Hill Construction, is predicting a 9% construction increase in 2010.
What does it all mean - who knows ... However, yesterday I reconfirmed what I already knew (from 2 lenders with expertise in environmental matters): most lenders still do not know a lot about environmental risk. This is particularly true for small (local) lenders that do not have in-house expertise. I was told some just lend and put their head in the sand regarding environmental matters. I also know that when speaking of multifamily - lenders tend to automatically think - how can there be environmental risk at an apartment complex? Ummm, in 2007 Capmark was ready to lend $8 million to an inexperienced multifamily borrower who was purchasing a property located in the middle of a Superfund site!
Multifamily properties come with numerous environmental issues: past, present and future - including, but not limited to: historical property uses (vapor intrusion), USTs/ASTs, indoor air quality (mold, asbestos, lead), and adjacent properties See Walnut Creek Manor vs. Mayhew Center wherein WCM is an apartment complex adjacent to a former industrial facility that contaminated WCM.
So opportunity exists. Focus on small (local) lenders and multifamily properties.
WSJ: "Business Fumes Over EPA Rule". The EPA and Obama Administration is anticipated to declare Carbon Dioxide a dangerous pollutant based on an endangerment finding.
The anticipated EPA regulation would give the feds the ability to require businesses to make costly changes to reduce emissions. This could come regardless of whether Congress accepts climate change legislation.
Is this the right thing to do in an already depressed economy? Appears to me the political verbiage has changed from global warming to climate change. See Hacked Emails regarding 'global warming.'
WSJ - "Why Commercial Real Estate Could be the Next Shoe to Drop". Why this seems to come as a surprise to the banks ("Banks will be slow to recognize the severity of the loss - just as they were in residential") is to me proof positive of the hubris of Wall Street and other big banks. The article describes the losses could be as severe as the crisis of the early 1990 - which is exactly where all the "know-it-all" rating agencies derived their 'stress tests' in evaluating CMBS. Hotels are one of the hardest hit property classifications. Ashford Hospitality Trust is in negotiations to modify the terms of its $101 million securitized mortgage on a 525 room Westin Hotel because ... per room revenue is down (precipitously). Construction loans are a big target of bank regulators (FDIC, OTS, FCC, OCC) and the scrutiny of banks for loan loss reserves. In good times - construction loans are the highest risk loans; as by definition there is no cash flow and the collateral is typically dirt or a partially finished building.
During 2006-07 I reviewed plenty of Phase I reports for proposed construction loans that identified contamination. It didn't matter. If you were a borrower with a pulse - Wall Street fell all over themselves to lend you money.
In a related WSJ article (today's WSJ), "BlackRock Up for Role Rating Risk At Insurers" - describes how insurance companies are turning to BlackRock analysts - not Fitch, Moody's, and S&P to "rate" MBS (residential loans backing securities). That is extremely significant as insurance companies are one of the biggest buyers of such bonds - holding nearly $3 trillion.
It is the 'secondary market' (securitization/rating agencies, etc.) that has driven Phase Is for commercial property from the 1990s through about 2007.
As the commercial defaults rise and AAA rated bonds get downgraded - the same institutional buyers (insurance companies, pension funds, REITs, etc.) could have the same reaction to rating agencies on the commercial side.
Ed
