Selling 'dirty property.'.

Owners of contaminated property face a multitude of problems. Unfortunately, the longer an owner waits to deal with the contamination, the worse the problems usually get. Some owners think that if they do nothing, their problems will simply go away. Unfortunately, this is not the case. Contaminated property is less likely to be sold, saddling reluctant owners with carrying costs until the problems are remedied.

Selling environmentally contaminated property is like entering a maze, since compliance with environmental regulations in selling industrial property is difficult to accomplish, let alone understand. Even an owner with the best intentions to remedy any outstanding toxic contamination can have infuriating problems. Further contamination can appear at any time, either from on-site operations or from those of a neighboring property. Sometimes, federal, state and local clean-up standards are established case-by-case, making it impossible to predict the time and cost associated with compliance. This deters, owners, lenders, developers and investors of industrial properties from selling, buying and developing dormant private property.

The regulations in place to remediate contaminated sites are often misapplied by sellers, small-time buyers and major corporations alike. A new industry of "ghostbusters" had emerged to rectify environmental problems. Asbestos agents clad in white costumes, whose prices were not only extremely uncompetitive, but in fact were sometimes quite outlandish, appeared from nowhere. Case in point: I recall getting estimates from two fledgling asbestos removal outfits in the late 1980's for one 40,000 square-foot industrial property. Their prices ranged from $40,000 in asbestos removal to $250,000 for the same specified job. Banks, quick to see this turn of events, began to cull the lists of ghostbusters to find which firms had legitimate scientific and business acumen. These approved lists allowed integrity to be factored in, and an industry with credibility thus began to emerge.

Since the enactment of the Federal Superfund Law in 1980 (Comprehensive Environmental Response, Compensation and Liability Act, or "CERCLA"), and its subsequent amendments in 1986 (Superfund Amendments and Reauthorization Act), commercial lenders require a satisfactory Phase I or Phase II environmental analysis on the designated property prior to mortgage commitment.

Commercial banks developed their own non-public list of preferred environmental remediation vendors. These lists enable prospective buyers/borrowers to select from as many as 40 different companies to conduct the environmental reports necessary to assure their lender of the properties' book value. The process is vastly improved from pre-Superfund days when buyers, if they even asked the question, took a seller's word at face value regarding the environmental condition of the property being sold, and banks were often left with untenable clean-up costs in the case of an unexpected foreclosure proceeding.

The result of these regulations has been a recoiling of lending activity on contaminated industrial sites. However, since the enactment of the federal law known as The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996, there has been somewhat of a rebound in this lending activity. The Act of 1996 states that a secured lender no longer has liability by putting a mortgage on a property. This means that lenders are not as concerned with liability as they had been since the 1980's, but they are still quite concerned with how any contamination might affect property value. Simply put, the process of assessing and mitigating the environmental condition of a property is daunting at best, and excruciatingly slow and costly at worst.

Today, largely through the efforts of the New York City Partnership, the Mayor's Office of Environmental Coordination and the Brownfields Initiatives Task Force, of which I am a member, these regulations are being reviewed, evaluated and sorted. This public-private collaboration effort is focused on identifying obstacles to Brownfields reclamation and implementing measures to encourage private, voluntary clean-ups, sometimes, even to a public benefit (i.e. movie theaters, shopping malls, ballfields, etc.). The goal of the Task Force is to let the market work by creating consistent and predicable guidelines which are legislatively compatible, and which will guarantee safe, responsible and final remediation. Ideally, in their final form, these guidelines would serve as a nationwide prototype for private owners of contaminated property, if not only in our tri-state region.

Current procedures and their accompanying legal fees have created a substantial universe of sellers who prefer to sell a property with no financing contingency and in its "as is" condition. This decision has several adverse results, not the first of which is to trigger a "cowboy" philosophy of trading property with no regard for the environmental dangers to the surrounding landscape or its inhabitants. It is also possible that the buyer has no intentions of cleaning the site, and that future circumstances will come back to haunt the seller. Furthermore, it goes without saying that this is certainly one sure way to limit a target markets. Interestingly, given the level of real estate trading still actively underway, there actually are a few buyers with the finesse and experience to conduct sophisticated and legal clean-ups who will step up to the plate and purchase a contaminated property under these extraordinary conditions.

Sellers of environmentally contaminated properties often do not understand that the sale of contaminated property is not like the sale of clean properly. Even those experienced buyers of contaminated property are having problems closing with sellers who somehow think that they can completely walk away from a contaminated property. Superfund laws say they cannot. The best that they can do is to have the level of contamination recorded, but the chain of title never dissolves. Future circumstances may result in that owner being contacted and held liable, even though the buyer may have agreed to assume the clean-up costs.

Lastly, there are now cases of property being "mothballed" by multi-national and small corporate owners alike, who refuse to sell at all due to their concerns of exposures. Many of these sites, then, may never be offered back into the marketplace nor ever cleaned. Ultimately, the Task Force Initiatives will pave the way for greater development opportunities, because first and foremost, these properties will, at last, be saleable.

Today, we are seeing sellers - big and small alike - begin to claim that they will not be in the chain of title, even if Superfund regulations assert that the chain of title never dies. This brings the deal to a halt. We are beginning to see sellers make representations that their indemnifications will die with the re-sale, a limited liability offering which again defies the Superfund chain of title issues. This condition of sale prevents a buyer from ever having a clear right to sell their asset, and thus kills the deal.

We are also beginning to see sellers offer impossibly slim time-frames to conduct due diligence. My office is currently involved in negotiations on three contaminated sites whose aggregate sale value is in the tens of millions of dollars. Many other sites would be ideal for offering to the marketplace were the process not so daunting to buyers and impossible to budget. We are beginning to see the emergence of a pool of contaminated property owners seeking to sell who clearly need to adjust their focus, if their focus is to sell. The somewhat grandiose expectations of a seller in a bullish market can be challenging, but as the temperature of a hot market drops a few notches, these challenges can make the likelihood of a deal completely untenable.