addressing environmental liabilities when buying land or business | caltha llp
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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
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…
Property vs. business environmental liabilities Property vs. business
environmental liabilitiesProperty
On-site contamination
Adjacent-site contamination
Property
On-site contamination
Adjacent-site contamination
Business
On-site contamination
Adjacent-site contamination
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
On-site contamination
Adjacent-site contamination
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.)
Potential consequencesPotential consequencesProperty
Cost to remediate
Reduction in property value
Reduction in marketability
Property use restrictions
Civil suits
Property
Cost to remediate
Reduction in property value
Reduction in marketability
Property use restrictions
Civil suits
Business
Cost to remediate
Reduction in property value
Reduction in marketability
Property use restrictions
Civil suits
Fines/Penalties/Consent orders
Cost to upgrade equipment
RP reimbursement demands
Worker claims
Increased overhead costs
Business
Cost to remediate
Reduction in property value
Reduction in marketability
Property use restrictions
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.
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
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
Residual liabilityResidual liability
Contamination identified on title
Contamination stigma
Property use restrictions
If area is disturbed, then
Sampling/risk reevaluation
Reassessment by agency
Costs to remediate to new conditions
Contamination identified on title
Contamination stigma
Property use restrictions
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
Phase 1 ESAPhase 1 ESA
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.
Phase 1 ESAPhase 1 ESA
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 vs. business environmental liabilities Property vs. business
environmental liabilitiesProperty
On-site contamination
Adjacent-site contamination
Property
On-site contamination
Adjacent-site contamination
Business
On-site contamination
Adjacent-site contamination
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
On-site contamination
Adjacent-site contamination
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.)
Property vs. business environmental liabilities Property vs. business
environmental liabilitiesProperty
On-site contamination
Adjacent-site contamination
Property
On-site contamination
Adjacent-site contamination
Business
On-site contamination
Adjacent-site contamination
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
On-site contamination
Adjacent-site contamination
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.)
EnvironmentalSite
Assessment
EnvironmentalDue
Diligence
Property vs. business environmental liabilities Property vs. business
environmental liabilitiesProperty
On-site contamination
Adjacent-site contamination
Property
On-site contamination
Adjacent-site contamination
Business
On-site contamination
Adjacent-site contamination
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
On-site contamination
Adjacent-site contamination
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.)
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…”
Proposed 2004 Standard
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
Proposed 2004 Standard
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
Proposed 2004 Standard
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
Proposed 2004 Standard
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
Proposed 2004 Standard
Preparer must evaluate fair market value if property were not contaminated
Property ValueProperty Value
§ 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.
Property ValueProperty Value
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 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
ESA – Rules of ThumbESA – Rules of Thumb
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!
ESA – Rules of ThumbESA – Rules of Thumb
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
ESA – Rules of ThumbESA – Rules of Thumb
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.
ESA – Rules of ThumbESA – Rules of Thumb
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 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
Environmental liabilityEnvironmental liability
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 vs. business environmental liabilities Property vs. business
environmental liabilitiesProperty
On-site contamination
Adjacent-site contamination
Property
On-site contamination
Adjacent-site contamination
Business
On-site contamination
Adjacent-site contamination
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
On-site contamination
Adjacent-site contamination
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.)
Environmental liabilityEnvironmental liability
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
Key pointsKey points
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
Key pointsKey points
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
Loren LarsonCaltha LLP