Environmental Due Diligence for Financial Professionals | Caltha LLP

Environmental Due DiligenceEnvironmental Due DiligenceA Primer for Financial Services ProfessionalsA Primer for Financial Services Professionals

TopicsTopics

What liabilities are we trying to control?

Risk management tools

Upcoming changes to US EPA and ASTM standards for property assessments

Quantifying environmental liabilities

What liabilities are we trying to control?

Risk management tools

Upcoming changes to US EPA and ASTM standards for property assessments

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 used to secure loan…

It depends on what is being used to secure loan…

Real estate (land) only Real estate (land) only

Real estate + assets Real estate + assets

Real estate + assets + liabilities “the business”

Real estate + assets + liabilities “the business”

Property vs. business environmental liabilities Property vs. business

environmental liabilitiesProperty

On-site contamination

Adjacent-site contamination

Property



Business



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



Use restrictions






Closed facilities



Potential consequencesPotential consequencesProperty

Cost to remediate

Reduction in property value

Reduction in marketability

Property use restrictions

Civil suits

Property

Cost to remediate




Civil suits

Business

Cost to remediate




Civil suits

Fines/Penalties/Consent orders

Cost to upgrade equipment

RP reimbursement demands

Worker claims

Increased overhead costs

Business

Cost to remediate




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.

(specifically excludes petroleum)

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.

(specifically excludes petroleum)

Other requirementsOther requirements

Federal RCRA

Federal TSCA

Federal Clean Water Act

Minnesota MERLA (State Superfund)

Civil actions (damage to neighbor's property)

Federal RCRA

Federal TSCA

Federal Clean Water Act

Minnesota MERLA (State Superfund)

Civil actions (damage to neighbor's property)

Risk Management ToolsRisk Management Tools

Tools to manage property liabilities

Tools to manage property liabilities

Insurance coverage

Purchase agreements

Release from liability issued by agency

Avoidance

Insurance coverage

Purchase agreements

Release from liability issued by agency

Avoidance

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

Limits on property useLimits on property use

Soil contaminationSoil contamination

Exposure and risks managedExposure and risks managed

Cleansoil

Asphalt

Residual liabilityResidual liability

Contamination identified on title

Contamination stigma


If area is disturbed, then

Sampling/risk reevaluation

Reassessment by agency

Costs to remediate to new conditions

Contamination identified on title

Contamination stigma


If area is disturbed, then

Sampling/risk reevaluation

Reassessment by agency

Costs to remediate to new conditions

AvoidanceAvoidance

Establish risk tolerance threshold

Assess sites

Determine if threshold is exceeded

Accept/decline

Establish risk tolerance threshold

Assess sites

Determine if threshold is exceeded

Accept/decline

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

Sometimes preceded by “Property Transaction Screening”

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

Sometimes preceded by “Property Transaction Screening”


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.


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



Business



Use restrictions






Closed facilities



Business



Use restrictions






Closed facilities







Property



Business



Use restrictions






Closed facilities



Business



Use restrictions






Closed facilities



EnvironmentalSite

Assessment

EnvironmentalDue

Diligence

Environmental-related business risks

Environmental-related business risks

• Buyers and 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 and 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

Identifying RECsIdentifying RECs

Identifying RECsIdentifying RECs

Spills of solvent in past – contaminated soils up to 40 PPM

In 1989, new owner required clean up to 1 PPM prior to taking title

All areas cleaned except directly under tank farm where soils still had 8 PPM

All spills were reported and afterwards USEPA reviewed and approved remediation

Current clean up requirement is 700 PPM

Spills of solvent in past – contaminated soils up to 40 PPM

In 1989, new owner required clean up to 1 PPM prior to taking title

All areas cleaned except directly under tank farm where soils still had 8 PPM

All spills were reported and afterwards USEPA reviewed and approved remediation

Current clean up requirement is 700 PPM

ESA – Rules of ThumbESA – Rules of Thumb

1. Always review a draft ESA report and check for completeness (use a checklist)

2. Consider rationale for all RECs and environmental-related business risks from the standpoint of the USER

3. Understand what property or business risks are/are not being addressed

4. Consider assessment from the perspective of a future Buyer

1. Always review a draft ESA report and check for completeness (use a checklist)

2. Consider rationale for all RECs and environmental-related business risks from the standpoint of the USER

3. Understand what property or business risks are/are not being addressed

4. Consider assessment from the perspective of a future Buyer

ESA – Rules of ThumbESA – Rules of Thumb

5. Double check address – changes and multiple addresses

6. Understand that the ESA is a subjective analysis

7. Remember that a final ESA report – good or bad- will become a permanent part of the record for the property

8. Understand limitations of the assessment

5. Double check address – changes and multiple addresses

6. Understand that the ESA is a subjective analysis

7. Remember that a final ESA report – good or bad- will become a permanent part of the record for the property

8. Understand limitations of the assessment

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

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

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

Estimating Environmental Liabilities Estimating Environmental Liabilities

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


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


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%





Property



Business



Use restrictions






Closed facilities



Business



Use restrictions






Closed facilities



QuestionsQuestions

Contact:

Loren LarsonCaltha LLP

Email:[email protected]

Contact:

Loren LarsonCalthaCaltha LLPLLP

Email:[email protected]@calthacompany.com

http://www.calthacompany.com/

http://www.calthacompany.com/

mailto:[email protected]?subject=Question%20Regarding%20Environmental%20Liability

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