Environmentally-sensitive property no longer taboo.
The natural uncertainty surrounding secured loans on such property had been exacerbated by lenders' concerns about their own potential liability for the cost of environmental remediation. More recently, however, lenders have begun to take a second look at the possibility of secured financing on environmentally sensitive property, and are no longer categorically avoiding such situations. This change has come about, in part, because of the recent issuance of federal regulations that offer lenders some protection against liability for remediation. More importantly, through experience, lenders have come to understand that environmental issues are not unfathomable mysteries. Rather, they are business and financial issues that can be satisfactorily addressed.
Under the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") the federal statute that governs the remediation of hazardous waste sites, liability for the full cost of cleanup can be imposed on any party who owns or operates a site. An owner or operator can face liability without regard to fault or whether the owner had any involvement in the disposal of waste at the site. [Substances which fall within the jurisdiction of CERCLA include asbestos, PCB's (formerly used in electrical equipment such as transformers) and a lengthy list of industrial chemicals]. CERCLA excludes from the definition of "owner or operator", secured creditors who hold indicia of ownership in the property (such as a mortgage) for the purpose of protecting their security interest, but without participating in the management of the facility. The critical issue then is the point at which a lender's involvement in its borrower's business becomes "participation in the management of the facility", thus depriving the lender of the statutory exclusion.
In 1990, the U.S. Court of Appeals for the 11th Circuit, which sits in Atlanta, issued a decision that substantially curtailed the CERCLA exclusion for secured creditors. The court, in United States vs. Fleet Factors Corp. 901 F.2d 1550, ruled that a lender may be held liable, if its participation in the facility's financial management is substantial enough that the lender has the capacity to control waste disposal decisions. The court stated that it was not necessary for the lender to actually participate in waste disposal decisions, or even involve itself in the day-to-day operations of the borrower's business. Fleet Factors caused great concern to lenders, because essential actions that lenders may take in addressing problem loans, such as renegotiation of the terms of the loan, or offering financial advice to the borrower, would now cause them to incur environmental liability.
In April 1992 the U.S. Environmental Protection Agency ("EPA") issued regulations that afford lenders a degree of protection from the prospect of environmental liability. For example, the regulations limit the meaning of "participate in the management of the facility" to the actual exercise of control over the borrower's enterprise, with respect to day-to-day operational decisions. Lenders are also permitted to engage in loan workout activities, without fear of losing the CERCLA exclusion. In addition, the regulations include guidelines as to actions lenders may take on foreclosure without incurring CERCLA liability (The regulations have been challenged in federal court, but remain in effect while the challenges are pending).
The EPA regulations do not completely alleviate lenders' concerns about environmentally sensitive property. Contamination can result in the imposition of liability on the borrower, which, of course, may impair the borrower's ability to repay the loan. In addition, contamination can also have the effect of diminishing the value of the property that is the collateral for the loan. Finally, the EPA regulations would not preclude the lender from facing environmental liability under applicable state.
Nevertheless, lenders are discovering that is not necessary to walk away from a deal solely because of the presence of environmental concerns. Environmental issues can be addressed and resolved and do not have to be obstacles to closing secured real property transactions. Companies seeking financing need to understand how environmental issues must be addressed, and what measures can be taken to resolve those issues successfully.
First of all, lenders cannot be expected to issue a loan without an understanding of the relevant environmental issues. Prospective borrowers should be prepared to bear the cost of necessary site assessments conducted by qualified environmental professionals. These assessments can include site visits and record searches (a "Phase I" assessment) and, if necessary, field sampling of soil, surface water and groundwater ("Phase II" investigation). (Of course, in the context of a purchase it may be possible to pass the costs of environmental assessments on to the seller). It is probably advisable to seek the lender's input on the specifications of the assessment, in order to avoid the risk that the lender will find the assessment unacceptable, thus causing increased costs and loss of valuable time.
Once the salient environmental concerns have been identified and understood, they can be resolved through the process of negotiation. Again, there is nothing mystical about this process -- environmental issues are resolved like any other negotiated items. For example, the lender may insist on a higher interest rate, or a shorter term, as a means of minimizing its risks. More frequently, borrowers are required to make representations and warranties, or to provide indemnifications to the lender. Another option is the setting aside of funds in an escrow account to address a need for cleanup arising in the future. Certainly combinations of these approaches can be utilized depending on the specifics of the transaction.
The simple fact is that all environmental issue are also business and financial issues. Awareness of this fact strips away the mystery and the trepidation with which business people have historically approached environmental problems. Increasing comprehension on the part of the lending institutions has made them more amenable to viewing environmental concerns as a manageable issue, within the context of a transaction, and not as an automatic impediment to issuing a loan.
Daniel J. Sitomer, Partner Environmental Law Practice Group Brown & Wood
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|Author:||Sitomer, Daniel J.|
|Publication:||Real Estate Weekly|
|Date:||Sep 30, 1992|
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