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Assessing Business Risks and Controls for the Financial Professional | Environmental Risks

To request this training at your location or for further information, go to: http://calthacompany.com/assessing-business-risks-controls-financial-professional-environmental-risks.html The professional development training module on assessing risks and applying risk management strategies to control risks associated with environmental contamination when buying real estate.

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Assessing Business Risks & ControlsAssessing 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
Apply
Controls
Assess
Risks
Liabilities Associated With
Real Estate
Liabilities Associated WithLiabilities 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”)

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Assessing Business Risks and Controls for the Financial Professional | Environmental Risks

  • 1. Assessing Business Risks & ControlsAssessing Business Risks & Controls For The Financial Professional:For The Financial Professional: Environmental RisksEnvironmental Risks Loren J. Larson Caltha LLP, Minneapolis
  • 2. 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?
  • 3. RisksRisksRisks • Uncertainties that can impact organization from achieving its objectives • Likelihood • Severity • Assessing risks tied to organization's objectives • Risks also included missed opportunities
  • 4. 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
  • 6. Liabilities Associated With Real Estate Liabilities Associated WithLiabilities 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”)
  • 7. 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)
  • 8. 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
  • 9. SBA Environmental Procedures & Policies SBA Environmental ProceduresSBA 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
  • 10. All Cleanup SitesAll Cleanup SitesAll Cleanup Sites
  • 12. Superfund Excluded Petroleum Sites Superfund ExcludedSuperfund Excluded Petroleum SitesPetroleum Sites
  • 13. 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.
  • 15. Recognized Environmental Conditions Recognized EnvironmentalRecognized 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
  • 16. Recognized Environmental Conditions Recognized EnvironmentalRecognized 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
  • 17. Environmental ReviewEnvironmental ReviewEnvironmental Review Phase 1 ESA 2 wks Phase 2 LSI 4-6 wks
  • 18. Environmental ReviewEnvironmental ReviewEnvironmental Review Phase 1 ESA 2 wks Phase 2 LSI 4-6 wks Report to State Duty Officer
  • 19. Environmental ReviewEnvironmental ReviewEnvironmental Review Phase 1 ESA 2 wks Phase 2 LSI 4-6 wks Report to State Duty Officer Liability Protection Letters Investigation / Cleanup Site Closure
  • 20. Environmental ReviewEnvironmental ReviewEnvironmental Review Phase 1 ESA 2 wks Phase 2 LSI 4-6 wks Report to State Duty Officer Liability Protection Letters Investigation / Cleanup Site Closure 7 wks months
  • 21. 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
  • 22. 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
  • 23. 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
  • 24. Closed Sites - Rule of ThumbClosed SitesClosed 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
  • 25. 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.
  • 26. Soil Vapor Intrusion SamplingSoil Vapor Intrusion Sampling
  • 27. Follow Up QuestionsFollow Up QuestionsFollow Up Questions Loren Larson llarson@calthacompany.com Caltha LLP Minneapolis, Minnesota (763) 208-6430