1. ENVIRONMENTAL ISSUES IN REAL ESTATE TRANSACTIONS RISKS AND OPPORTUNITIES IN 2010

2. Welcome and Happy St. Patrick’s Day!

3. THIS MORNING Environmental Liability and Due Diligence When you need a Phase II… Allocating risks in the transaction Buying or leasing contaminated property Foreclosure Sales: managing the environmental risks of buyers The secured creditor exemption

4. Primary Sources of Liability Comprehensive Environmental Response Compensation and Liability Act (“CERCLA” or “Superfund”) 42 U.S.C. § 9601 et seq. New Hampshire Hazardous Waste Cleanup Fund – RSA 147-B

5. CERCLA and RSA 147-B Owners, Operators, Generators and Transporters Strict liability – most often it is joint and several Costs of investigation, cleanup, monitoring and more Incurred by the government and any other person

6. Potentially Liable “Owners” Current owners Owners at the time of disposal Lessees Lenders Fiduciaries Owners of contiguous property

7. Original Defenses An act of God An act of war An act or omission of an unrelated third party; defendant exercised due care and took appropriate precautions

8. Additional Defenses/Exclusions/ Exceptions Innocent landowner U.S. N.H. (1986) (1989) Lender U.S. N.H. (1996) (1993) Fiduciary U.S. N.H. (1996) (1993)

9. Additional Defenses/Exclusions/Exceptions (cont’d.) De micromis U.S. N.H. (2002) (None) Municipal Solid Waste U.S. N.H. (2002) (None) Contiguous property U.S. N.H. owners (2002) (1996) Bona fide prospective U.S. N.H. purchaser (2002) (None)

11. SUPERFUND DEFENSES FOR BUYERS INNOCENT LANDOWNERS -- take without knowledge of contamination CONTIGUOUS PROPERTY OWNERS -- take without knowledge of contamination but BONA FIDE PROSPECTIVE PURCHASERS -- take with knowledge of contamination

12. SCOPE OF SUPERFUND AND AAI RULE Purchase of commercial property Purchase of any property for commercial or public use Residential property purchase if inspection and title search reveal need for more investigation

13. AVOID LIABILITY and SAVE MONEY!! Obtain Superfund defenses – avoid further costs Identify cleanup costs, impact on project -- so they can be allocated and Set sales price without discount or negotiate price with seller Satisfy lenders Buy environmental insurance

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15. Federal and State Due Diligence/All Appropriate Inquiry -- Why Bother? All Appropriate Inquiry is required to assert any of the Superfund defenses, at time of acquisition, AND May be required by the lender

16. How Much Diligence is Due? DEPENDS ON YOUR NEEDS!! “ Transaction Screen ” is NOT AAI ASTM Phase I is AAI to assert defenses, AT A MINIMUM! Also, new Forest Land Phase I Are there “Significant” Data Gaps? Other types of Due Diligence Need to determine migration potential? Need to determine cost of cleanup? Need to determine whether business is in compliance with law?

17. What’s a “Phase I” anyway? Doesn’t involve sampling Does it have to meet ASTM 1527-05? What is the timing? Before acquiring property! Who is the “User”? Critical!

18. ASTM STANDARD 97 defined terms, fine print “Environmental Professional” needed Records Review Site Reconnaissance Interviews with present and past owners, operators, key site manager, governments User Statements, liens, registry review for recorded activity and use limitations Report Q: Recommendation on additional investigation?

20. Distressed Property: Should you be stressed? More Due Diligence? Cautions: Distressed Properties and Businesses more likely to have environmental issues? Maybe. More Due Diligence Required? Maybe Beware dated information! Timing of opportunity for assessment may be compressed Brownfields Grant opportunities? If in foreclosure, may not be able to do Phase I, e.g., if no access or interview of key site manager.

21. Do I REALLY TRULY HAVE to Do a Phase II (Sampling Investigation)? Usually not! BUT….. Under AAI Rule, mandatory if data gap and Environmental Professional cannot render an opinion Vapor Intrusion investigation may be required to render an opinion If BFPP, may be required as “Appropriate Care by Taking Reasonable Steps to Prevent, Control or Limit Release” EPA Brownfields Programs require

23. PHASE II DESIRABLE, EVEN IF NOT REQUIRED: 1.Determine extent of contamination, potential impact on neighbors, workers 2.Satisfy your lender 3.Determine cleanup costs 4.Address site with government agencies

24. PHASE II ISSUES Cost and Timing, and who does it Permissions Is reporting of the data required to the regulators? To the other parties involved? To the occupants/tenants?

25. “CONTINUING OBLIGATIONS” TO MAINTAIN DEFENSES 1.Full cooperation with environmental agencies, which may include government cleanup 2.Comply with information requests 3.Comply with land use restrictions and institutional controls 4.Take reasonable steps to prevent, limit releases and exposures, and exercise appropriate care 5.Comply with spill reporting obligations

26. MISTAKE: Look Only at ASTM and Superfund Liabilities ASTM only looks at likelihood of contaminated property Doesn’t consider environmental liabilities of business activities + Ongoing operation compliance + Off-site disposal liabilities + OSHA liabilities + Potential claims for nuisance, trespass, negligence by neighbors, trespassers, guests

27. Allocating Environmental Risk in a Commercial Real Estate Transaction 4 Opportunities to assess, investigate and allocate environmental risk Prior to contract Purchase and sale provisions Due diligence Closing documents

28. Pre-Agreement Assessment – Seller Review any environmental reports generated at the time of your purchase, or in connection with any financing Consider a Phase I to provide “comfort” and enhance property value

29. Pre-Agreement Assessment – Seller (cont’d.) Deal affirmatively with known issues either through disclosure or clean up in advance of listing. In New Hampshire, a seller has an obligation to disclose concealed defects that are: √ Known to the seller √ Unknown to the buyer √ Incapable of detection upon a reasonable inspection √ Dangerous to property or life

30. Pre-Agreement Assessment – Seller (cont’d.) Review conditions contained in any existing permits or approvals to determine compliance, and consider any necessary action

31. Pre-Agreement Assessment – Buyer Review the seller disclosures Do your homework on the area – talk to local municipal officials about the property, the neighborhood, and prior uses Walk the site and look at use of surrounding properties Consider title work to determine any environmental liens or institutional controls recorded against the property

32. Purchase and Sale Agreement – Representations and Warranties No knowledge (actual or constructive) of current or former violations or claims No knowledge (actual or constructive) of facts which would give rise to violations or claims Compliance: √ At closing √ During seller’s period of ownership √ Prior to seller’s period of ownership

33. Purchase and Sale Agreement – Additional Considerations Access to seller’s environmental reports and permits Restrictions on level of investigations during due diligence √ Invasive vs. non-invasive √ Specific reference to Phase I ESA (be sure to reference ASTM standards) Indemnity for damage to property and other claims as a result of inspections (but not for environmental results or required reporting)

34. Purchase and Sale – Due Diligence If there is a known environmental problem, or one is discovered during due diligence, consider an agreement or provisions in the purchase and sale relative to: Split sampling Review and editing of reports prior to final draft and reporting to government √ Beware of independent duty to report (See RSA 146-A:5 regarding oil discharge, e.g.) Reasonable control over scope of additional investigation Enhanced indemnity clauses ( see Closing section)

35. Closing – Indemnity, Defense and Hold Harmless Agreements An indemnity is an agreement to compensate another party to a contract for certain losses that such other party may suffer during the performance of a contract. A defense clause is an agreement to provide a legal defense in the event that such losses occur. A hold harmless clause is an agreement under which one or both parties agree not to hold the other party responsible for certain loss, damage, or legal liability.

36. Closing – Contents of a Buyer- Seller Indemnity A good environmental indemnity provides for defense and consultant costs remediation costs fines and penalties perpetual or reasonable time limits on coverage bifurcation of responsibility according to period of ownership

37. Closing – Contents of a Lender Indemnity Typical for commercial financing transactions Sometimes a separate agreement, sometimes a mortgage or loan covenant Generally very broad in scope and unlimited in duration

38. Closing – Post Closing Agreements In order to address issues which will survive the closing, additional agreements may be necessary to address monitoring and testing reporting access escrows for actual or potential remediation environmental insurance

39. Leasing A combination of the above clauses, to include Representations and warranties Indemnities and hold harmless (account for joint use of property, as applicable) On-going monitoring, testing and reporting issues, if any Consider environmental due diligence for base line

40. Buying or Leasing Contaminated Property BFPP liability protection NH Brownfields liability protection

41. When is a Lessee an Owner? -“indicia of ownership” – 1)Long term lease 2)Lessor/owner has no say how property used 3)Lessee absolute right to sublet 4)Lessee responsible for all payments 5)Lessee responsible for all repairs 6)Lessor/owner has no right to terminate early

42. 2009 EPA Guidance on BFPP and Lessees Owners of contaminated property may prefer to lease v. sell Lessees with “indicia of ownership” can be a BFPP Lessees with “derivative” BFPP status can maintain such status if Owner loses BFPP status

43. N.H. Brownfields Program The covenant program Voluntary cleanup program Due diligence and liability risks when purchasing covenant or voluntary cleanup properties Violations of use restrictions or program requirements may void covenant resulting in strict liability

44. Recent Trends – Foreclosure Trends in New Hampshire from the Registry Review

45. Recent Trends – Who Is Buying at Foreclosure? Lenders seem to be taking properties back at foreclosure at a greater pace than the recession of the late 80s and early 90s, and also frequently postponing and cancelling sales

46. Anatomy of a Foreclosure Sale in NH No disclosures by the lender No representations or warranties by the lender Substantial cash deposit Limited, if any, access to property prior to purchase Fast closing from date of sale (30 to 45 days) No financing contingency Deferred maintenance issues

47. The Optional Considerations of a Traditional Buyer Become “Less Optional” Investigating the prior use of the property through inquiry of local officials Reviewing planning, zoning and enforcement files Having a title search done to reveal environmental (and other!) issues

48. In addition, you should consider Purchasing a transaction screen report/data base search by a professional Talking to parties in possession (maybe not the owner…) Investigating the possibility of access prior to closing Without access and discussions with owners or occupiers, a Phase I providing “innocent purchaser” defense may not be available, so you might consider Allowing the lender to take the property back

49. Real Estate Owned, or REO Sales Same risks as foreclosure, except: More time for due diligence More time for closing Potential for access is greater

50. Lenders – Maintaining the Secured Creditor Exemption Lenders take risks with capital – but not unlimited risk! What is lender’s Environmental Risk Program?” Critical to avoid unlimited liability: Don’t participate in management of facility or make waste management decisions before foreclosure

51. BEFORE FORECLOSURE OK – requiring environmental compliance and cleanup, extending credit for that purpose, monitoring and inspecting. NOT OK – Decision-making control over operations or environmental compliance Q: Should lender do a Phase I or Phase II before foreclosure (a) as a hedge against losing liability after foreclosure, or (b) to help market the property?

52. AFTER FORECLOSURE OK – “maintain business activities”, windup operations, undertake a cleanup action, take actions to preserve, protect or prepare the property for sale MUST – attempt to sell or release or otherwise divest at the earliest practicable, commercially reasonable time Additional requirements – listing within 5 months, sale within 3 years or burden shifts to lender

53. BUT LENDERS STILL HAVE LIABILITY AFTER FORECLOSURE WHEN They run the enterprise They arrange for disposal They obtain permits, or otherwise assume liability directly

54. QUESTIONS??