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![Reintroductions David Quigley Akin Gump Strauss Hauer & Feld, LLP 1333 New Hampshire Avenue, NW Washington, DC 20036 202.887.4339 [email_address] www.akingump.com www.ClimateIntel.com Daniel Spandau DJS Consulting 22258 Waterside Dr. Boca Raton, FL 33428 561.239.0090 [email_address] www.PBSdocs.com](https://image.slidesharecdn.com/duediligencesigma120210-12925989048161-phpapp01/85/Due-Diligence-Property-Transactions-3-320.jpg)
Due Diligence - Property Transactions
- 1. Time for GoodBuys: Acquisition Due Diligence December 2nd, 2010 Daniel Spandau Senior Consultant DJS Consulting Inc. David H. Quigley
- 2. Agenda Re-Introductions TheReal Estate Cycle Environmentally Challenged Properties Should you or Shouldn’t you? Incentives Financial Regulatory Due Diligence
- 3. Reintroductions David QuigleyAkin Gump Strauss Hauer & Feld, LLP 1333 New Hampshire Avenue, NW Washington, DC 20036 202.887.4339 [email_address] www.akingump.com www.ClimateIntel.com Daniel Spandau DJS Consulting 22258 Waterside Dr. Boca Raton, FL 33428 561.239.0090 [email_address] www.PBSdocs.com
- 4. The Real EstateCycle Some Signs of Recovery Below-Market Opportunities “ Environmentally Challenged” Real Estate Informal Poll of Share Group Should You or Shouldn’t You? Buy or Sell?
- 5. Incentives State andLocal Government Programs Redevelopment Grants (NYC) $10 Million in Grants over 2 Years Database of 3,000 Brownfields Up to $140,000 per Property Fund Phase I and Phase II Assessments Tax Incentives (NJ, PA) Rebate of Cleanup Costs (75%) That Increase Revenue Reimbursement of Other Remediation Costs (50%) Tax Credits for New Employees at Remediated Sites “ Comfort” Letters
- 6. Incentives (Cont’d) FederalAudit Policy Waives Penalties for Pre-Purchase Non-Compliance Waives Economic Benefit Penalties Gives (At Least) 45 Days to Report Ignores Purchaser’s Prior Violations Onus on Due Diligence
- 7. Due Diligence –Why? CERCLA, CERCLA, CERCLA What CERCLA Does… Removal or Remediation at a Facility; or Reimbursement of Removal or Remediation Costs Incurred by Third Parties or Governmental Entities … To Whom Current Owner or Operator; Owner or Operator at the Time of Disposal; Parties That Arranged for Disposal at the Site What CERCLA Does Not Do Petroleum Still Need Due Diligence for Incentives Petroleum Release Reporting Requirements Similar in Any Event
- 8. Due Diligence –Why? Defenses to CERCLA, Similar Liability Limited Strict Liability Statute Act of God Act of War Act of Third Party
- 9. Due Diligence –Why? Establishing the Third Party Defense Defense Easily Abused (“Past Owner Did It”) Congress Limits Defense Act of Third Party Not a defense if: A Contractual Relationship Exists Deeds or Land Contracts Leases Unless “Innocent Landowner”
- 10. Due Diligence –Why? Key: Establishing Who Is Innocent Landowner Pre-Acquisition: 1) Purchaser Did Not Know of Contamination at Purchase 2) Purchaser Had No Reason to Know of Contamination Post-Acquisition Purchaser complies with any land-use restrictions Purchaser takes “reasonable steps” to prevent releases Purchaser cooperates with regulators
- 11. Due Diligence –How? Pre-November 1, 2006: ASTM Standard E-1527-00 Phase I Assessment Generic Environmental Consultant On-site Inspection for RECs “ Attempt” to Interview Owner, Manager, Occupants Review of Federal, State Environmental Databases Review of Uses Back to 1940, or Earlier Report Valid for Six Months No Real Requirement to Fill Data Gaps
- 12. Due Diligence –How Now? As of November 1, 2006: All Appropriate Inquiry Rule New, more stringent requirements Apply to Consultants; and Add Requirements for Purchaser Herself New ASTM Standard E-1527-05
- 13. Due Diligence –Who? Purchaser Obligations Don’t End with Hiring of Consultant Search Environmental Cleanup Liens Apply Specialized Knowledge of the Site, Area Assess Purchase Price Is It Market? If not, Is It Because of Environmental Contamination? Provide Results to Environmental Professional
- 14. Due Diligence –Who? “ Environmental Professionals” Increase in “Judgment Calls” Requires Greater Qualifications Written Report Must Certify EP Has: State Engineer/Geologist License + 3 Years Experience B.S. + 5 Years Experience 10 + Years Relevant Experience
- 15. Due Diligence –What? On-Site Investigation Subject Property; and Adjoining Properties (from the Property Line) Consider Conditions Indicative of Release Fill Data Gaps Records Review, Phase II
- 16. Due Diligence –What? Must Interview: Current Owner; Current “Major” Occupants; Site Managers; Past Owners, Operators, Occupants (Employees?); Neighboring Owners (If Land Abandoned)
- 17. Due Diligence –What? Records Review Federal and State; and Tribal and Local Search to Time Site First Contained a Structure
- 18. Due Diligence –When? Report Must Issue within 1 Year of Acquisition If Expires Pre-Close, Update Certain Elements Require Update Every 180 Days EP Certification; Interviews; Government Records; and Visual Site Inspection Effectively a 6-Month Window
- 19. Due Diligence –Lessons Learned Choose the Right Consultant How Much AAI is Too Much? To Phase II or Not Phase II? Wrong Consultant? Choose the Right Attorney Case Studies in Overzealous Diggers
- 20. Investigation Phase IIdentifications of REC’s Consultant needs to: Alert client to all major issues Be familiar with industry/industrial process Evaluate Phase II requirements Consultant has potential liabilities Third party review – client attorney privileged
- 21. Investigation cont. PhaseII Cost factor Time constraints Who is the information for Alternative methods of investigation Start to dig or search for more paperwork Probe or Scan Testing methodologies Seller agreements
- 22. Third Party ReviewClient attorney privileged communication Develop SOP Develop cost matrix Qualify contractor Draft report to attorney Review of report completeness Review of REC’s Recommendation
- 23. Determination Factors Assessmentsequality factors Buyer Single property Portfolio Seller Banker Lender Foreclosurer
- 24. Case Study –Risk + Agreement Oil Company Package of ~ 400 locations Time constraints to close deal ~ 60 locations with possible REC’s Contractual agreement with seller Saving of $5 - $15,000/per location in investigations
- 25. Case Study –More paperwork UST – Emergency generation Installation review Records management Fuel Throughput Testing REC - $10-15,000 More then the potential cleanup (if ever necessary)
- 26. Case Study –Reasonability Office Complex REC – close proximity to residential dump area Apparent data suggest Limited Phase II More in-depth informational review Depth to Water ~5 ft Dump has been inactive to ~15 yrs. Dump is no longer evident – currently parking area Lots of soil movement No additional investigation recommendation $10-15,000 savings
- 27. Case Study –What data Industrial Process REC – collection of soil and water samples Collecting and analyzing data State regulated sampling and analysis Informational assessment Cost differential - $5-10,000
- 28. Case Study –Contractor Expertise Industrial Process Phase I review was limited Contractor was not familiar with potential concerns Review identified additional sampling and analysis that was necessary to protect client
- 29. Case Study –Property Managment Warehouse and light industrial complex Company property manager requested a review Consultant identified a variety of REC’s Estimated investigation and expected remediation >$500,000 There were no Federal, State or Local request for investigations Previous investigations were all in compliance Background levels were negotiated as acceptable Recommendation – no additional work needed
Editor's Notes
- #8 TIME: 0:00-0:10 Obviously, one of the reasons our groups work together is CERCLA Comprehensive Environmental Response, Compensation, and Liability Act Paul to give his background, cut his teeth on Love Canal, etc. CERCLA is like Match.com for our two groups A little background will explain why
- #9 TIME: 0:10-0:12 CERCLA hard to defend against For all intents and purposes, a strict liability statute Discuss exceptions (these will appear one at a time) Act of God (picture shows chemical drums “distributed” into residential areas by Hurricane Katrina) (discuss freedom from liability for these drums to current owners, prospective purchasers) Act of War (rarely used; perhaps discuss 9-11 or potential attack on chemical facility) Third Party Focus of discussion today Most utilized defense Now used to absolve current owner (or new purchaser) from sins of owners past
- #10 TIME: 0:12-0:14 Defense gave way to reality that many sites contaminated Without limits on third party defense, could get sham, or at least undesirable, transactions Party pollutes site, then sells New owner claims Act of Third Party, skirts liability Government must track down old owner to cleanup site Significant limits as a result In general, prospective purchasers, lessees, etc. cannot use third party defense Where they can: If they are innocent purchasers Our sections work together to establish that our clients meet the definition of innocent
- #11 TIME: 0:14-0:17 Who is innocent for purposes of CERCLA such that they can avoid liability? Cannot know of contamination prior to acquisition Cannot have reason to know of contamination While we will not discuss in great detail today, also must take steps post-acquisition to preserve the privilege (go through bullets) How do you know when you have reason to know? Due diligence Regulations tell us how hard we have to look, what to look for (in other words, prescribe when due diligence is done) Note: bottom bullet will slide off bottom of page to transition to how we determine what due diligence required prior to new rule
- #12 TIME: 0:17-0:25 Point out how you find it “odd” that you have to establish not knowing something The due diligence you are used to (pre-new rule) EPA regulations referenced ASTM standard E-1527-00 2000 standard promulgated by group Explain a little about the group, essentially a professional organization like ISO, etc. Consultants call it E-1527; you and I are more likely to refer to it as a Phase I NEED TO GO THROUGH ELEMENTS WITH EMPHASIS ON AREAS THAT WILL CHANGE Focus is on Recognized Environmental Conditions – presence or likely presence of any hazardous substances that indicate an existing or past release (talk about how this is essentially a standard that requires PROOF OF CONTAMINATION, i.e. not a problem unless you see release) Prospective purchaser hires consultant (rarely involved beyond that) Any environmental consultant can perform; not rocket science (typically a low-level newcomer) Walks site (and ONLY looks on-site) for obvious evidence of staining, tanks, etc. Knocks on door to try to interview manager, may call current owner, last know number, etc. (not much more) Will review federal and state databases only (go through ERNS, Sanborne, what they show) Review will date back to 1940 or earliest known development, whichever is earlier Must close within 6 months of report to get full protections, consider information up-to-date Can leave items needing further investigation (USE EXAMPLES SIMILAR TO THESE, to be picked up again in second half of presentation) If need further review to identify, delineate presumed spill from neighboring property, that’s ok (again, need proof there IS a release affecting Site for it to be a problem…creates incentive not to look deeply, live in ignorant bliss) Similarly, if know UST was pulled next door, but no records show whether it was clean, that’s ok No phase II requirement
- #13 TIME: 0:25-0:30 All of that changed on November 1, 2005 New regulation takes effect November 2006 Replaces “Phase I” parlance with “All Appropriate Inquiry” Much more stringent Includes requirements for the owner/prospective purchaser (cannot just select consultant and then sit on sidelines) Sets requirements for who can be a consultant, what they must do Transition/introduction of DQ
- #14 TIME: 0:30-0:35 Purchaser no longer on sidelines Presumption that consultants are good at dirt and water issues Presumption that consultants not good at business side How much is property worth? Business side of particular industry New law makes purchaser responsible for doing some “corporate environmental due diligence,” to assist consultant Responsible for knowing if environmental cleanup lien Responsible for specialized knowledge about area, industry Ex: if you own a chemical facility and are buying a new one Ex: if you own a chemical facility and there is a chemical facility adjacent to a site you want to purchase Responsible for gauging reasonableness of purchase price If below market, need to ask why? Related to environmental concerns? Must provide above information to consultant Rule does not require (may, shall) ASTM standard requires Not surprising (written by engineers who want benefit of info) Effect of making it part of regulation, since if there is even one person out there doing this, then everyone else is not doing as much as they could if they don’t (otherwise, it’s just “most” appropriate inquiry, not “all”)
- #15 TIME: 0:35-0:38 Purchaser not only one doing more Consultants do more, too Oh, and not called consultants anymore, now are “Environmental Professionals,” or EPs As we will discuss, making more judgment decisions, EPA decided needed to be more qualified Go through bullets “ Relevant Experience” = ability to perform environmental site assessments, understand surface and subsurface environmental conditions
- #16 TIME: 0:38-0:42 Site visit Paul talked about walking the site, looking at everything on-site Obligation used to end there, no longer does; must walk up to edge of site and look out at adjacent properties Standard of what you’re looking for is different, too Used to look for RECs; evidence that there has been a release Almost an accounting term Recognized Environmental Condition I see the chemical sheen floating on the groundwater, so I know there was a release Now, looking to see if one can reasonably identify conditions indicative of a release and threatened releases don’t necessarily need to see or smell chemicals if conditions indicate there may have been a release, must follow up No more ignorant bliss; lack of proof of a release does not let purchaser off hook, must show no indications of release Drum in picture example Old system: drums are empty, but soil clear, no proof of release New system: empty drums indicate there may have been a release, but I don’t know. Data gap. No requirement for phase II under old system, now I have to fill the gap. Phase II, records review indicating burial of empty drums, etc. Paul’s example: spill on neighboring property
- #17 TIME: 0:42-0:45 Probably most significant area of change comes in site interviews Old rule: “reasonable attempt to interview current owner/operator” New rule: MUST interview present owners; operators; occupants If many tenants, must interview major tenants, as well as anyone likely to use hazardous substances MUST interview owners of neighboring properties if your site visit showed those properties to be abandoned such that you could not gauge uses If cannot close your data gaps with above, must also interview past owners, operators, employees (many times, tenant will suggest “I’m just a restaurant, but I think there may have been a dry cleaner here.” Now you have to go find them).
- #18 TIME: 0:45-0:48 Similar to old system, but add state and local, tribal Fire departments, etc. -- responsible for spill response, cleanup, sometimes tank registration One helpful item: just go back to first development If mall showed up in 1999, just search back until them Previously, had to go back to 1940
- #19 TIME: 0:48-0:51 In some ways, more lenient (get one year, as opposed to six months) In practice though, still must update most important elements every six months Distinction without much of a difference
- #20 TIME: 0:51-0:55 Paul: Greater certification requirements mean you will need to be more selective in choosing consultants. We can help. Also, while the rules are more onerous, there are exceptions we can help interpret. Vacant, previously undeveloped properties, for example, do not face same level of scrutiny. There are also exceptions for quantities or amounts of hazardous substances that, in EP’s opinion, “generally would not pose a threat to human health or the environment.” DQ: Recall that we discussed in the beginning that there are post-acquisition requirements a purchaser must comply with to maintain the innocent landowner protections. Those include taking “reasonable steps” to remedy any contamination identified during the due diligence. In those circumstances, a purchaser usually goes to a regulator prior to close to say “hey, we did our diligence using the new AAI rule and found the following.” State wants beneficial use of property, so has programs in place to help you. VRPs, Brownfields. Talk about GMAC Virginia site (comfort letter, etc.)