Every couple of months my wife reminds me that I read too many things and that I need to clean out the piles of magazines and others things that I have read. But I enjoy reading about a number of different subjects, and every once and a while I come across an article that actually applies to what I do to make a living.
This happened recently when I came across an interesting article in the May 2001 issue of Builder magazine. The article, entitled "Sins of the Farmers" by Matthew Power, dealt with the issue of contamination on former agricultural land and the financial burden that it can place on redevelopment of this type of property. The article was very relevant to me at that time because of various large agricultural properties slated for redevelopment that we were evaluating for clients, several of which had significant pesticide contamination issues discovered during the assessment process.
Agricultural properties are not the ones that developers and lenders typically think of as being of environmental concern. A drive past these properties shows them to be natural-looking parcels (they have typically been out of agricultural use for many years) where it doesn't seem that any concerns exist. But some of the more toxic substances (such as DDT, lead-arsenate, and others) which were designed to kill weeds and critters were frequently used on these properties. Due to potential health concerns identified for these compounds, the cleanup standards that have been issued by regulatory agencies for these substances are very stringent. This, coupled with the fact that these sites are commonly planned for redevelopment as residential lots, can make cleanup a costly item.
In evaluating these properties, one key that we have learned is that the testing program should be designed and implemented by someone knowledgeable in the subject. On one recent project that we completed, our research indicated that a type of herbicide had been used at the site that would not be detected by common testing protocols. So our approach was to work with the laboratory to ensure that the testing program would detect the compounds that were actually used at the site.
The key to successfully redeveloping these types of properties is to determine prior to the purchase what potential environmental liabilities exist at the site. A purchase price adjustment can then often be negotiated to address the detected contamination. Since few states require testing of former agricultural land, the burden for determining whether a site is impacted or not falls to the developer or their lender. A little bit of proactive research and testing (compared to the potential liability) can save a large aspirin bill as the redevelopment project proceeds.
Interest Rates are Falling
"Interest rates are falling down, falling down, falling down
Interest rates are falling down, my fair lady."
Ok, so I've got little kids. But historically, a drop in interest rates has been the trigger for a lot of phone calls that start off something like this. "Hi, Dave? Hey this is Veep Combanker over at Midsize Loan. I've got a client coming in to talk about refinancing his loan. He's got an environmental report that's only about 18 months old. Do I need to do another study?"
These calls are tough. Everybody wants the answer to be "No", because it saves closing costs, and generally builds goodwill all around. Okay, maybe everybody at the bank except the risk management folks wants the answer to be "No."
Why do an update of a fresh report? Well for one, the ASTM standard limits the useful life of a Phase I Report to six months, which is the direct result of the fact that sometimes things change.
Our advice?
1) Look at the bank's own internal policy first. We didn't write it and don't have a vote on the board of directors. If you need something ASTM-compliant, get an in-house interpretation on what this means to you regarding aged reports.
2) If you have some latitude on whether to bypass a full environmental review, look at the file yourself. Be on the lookout for poorly prepared reports and for a "problem site" that is fraught with opportunities for things to change for the worse. Sure, this isn't your primary area of expertise but trust your instincts a bit - my experience has been that if a banker asks me to look at a problem report, there are usually problems.
3) If you have doubts, call for help. Usually within the first telephone call, we can go through a quick question-and-answer session and steer you toward the level of study that would seem to make sense.
Important Thoughts During Mergers and Acquisitions
ERL frequently assists its Clients with the evaluation of environmental liabilities during mergers and acquisitions. I was recently discussing this with an attorney, and he raised some issues that warrant forwarding to you.
The attorney, R. Bradford Fawley of Downs, Rachlin & Martin PLLC in Vermont, was discussing how he has assisted many of his Clients recover insurance money from historic policies for environmental contamination issues. The key concept during mergers and acquisitions is that insurance coverage may be transferred to the new owner of a business at the time of transfer, making coverage for contamination an asset that should be considered in the deal. If it can be shown that the contamination occurred while a policy was in effect, coverage may be possible. However, to successfully obtain insurance coverage for past contamination, he pointed out several issues that should be addressed during the transaction (or compiled now, for previous transactions) and at the time the contamination is detected.
First, you have to know what policies have been in place for the business and what they covered, or more importantly, what they excluded. The best way to know this is to gather copies of all of the historical policies. While this can be a difficult task, it is critical in ensuring that each potential insurer can be notified immediately upon discovery of historical contamination, avoiding potential loss of coverage due to slow notification. Also, discovery can take many forms beyond just poking a hole in the ground and finding contamination. Other discovery events include lawsuits, notification as a potentially responsible party (PRP), a threatening letter or phone call related to environmental issues, or a known spill or release to name a few.
The second item he mentioned was the importance of quick notification of a claim to the potential insurers. Many insurance policies have a requirement that immediate notification be made upon discovery of a potential claim issue. Non-compliance with this requirement can often lead to a denial of coverage, so having a list of who to notify can be critical.
Obviously, these types of claims are very complicated, and insurance brokers or companies often indicate (based on their understanding of the issue) that coverage does not apply when, in fact, it is possible. So the first step should always be to prepare in advance, if necessary with the assistance of counsel who is familiar with these types of claims.
If you have any questions regarding this matter or would like to know how to get in touch with knowledgeable counsel, please feel free to contact ERL at 800-883-1568.
