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More environmental surprises may lie ahead.

Recently, President Bush and the Environmental Protection Agency (EPA) seemingly put to rest the tremendous concerns of the lending and real estate communities, when it eased the liability of banks for pollution caused by businesses to which they loaned money. The April ruling finally accomplished what Congress had been attempting, but failed to do for the past two years through bills in both the Senate and the House of Representatives.

Commercial property owners have also seen hints at similar forms of relief on the regional level. For example, there have been major efforts during the past six months to revamp New Jersey's Environmental Cleanup Responsibility Act (ECRA), which has been viewed as a major stumbling block to urban investment. The state's Senate Environment Committee has held several hearings during the first half of this year on exactly this topic, and Governor Jim Florio has announced his intentions to enact major changes.

This is indeed good news to an industry that has been suffering through a sluggish economy, as well as through the inequities of many regulatory acts. However, property owners should not be too quick to view such government moves as an easing of environmental liability under state or federal statutes.

Despite the flurry of regulatory activity that may, at first glance, appear to the contrary, environmental compliance stipulations are not losing their teeth or importance. If the real estate community has learned anything during the course of the past 12 years, since the introduction of the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), it has come to understand that pollution liability and environmental responsibility are now facts of life.

With regard to the recent lender ruling, it is important to understand that this act is only an attempt to correct inequities under existing regulations and is not a broad stroke undercutting environmental legislation. The EPA has simply restored exemptions for lenders that were previously determined to be ambiguous under CERCLA, and which were challenged in such cases as U.S. vs. Fleet Factor Corporation.

This move also provides protection for banks who acquired polluted properties because the original owners went bankrupt or defaulted on loans. It protects them from being held jointly liable for pollution cleanups, when they had no management in the operation of the business involved, aside from a financial investment. It does not reduce the liability for the remainder of the real estate community, nor does it mean that financial institutions will now begin to ease their own due diligence criteria when underwriting loans to developers or property owners.

Area property owners still face broad liabilities under CERCLA, also known as Superfund. If anything, the EPA's lender action may broaden the liability faced by the remainder of the real estate community the place further pressure on property owners to tighten due diligence programs with regard to the environment. Since regulators are going to continue to focus on offsetting the costs of cleanup from the taxpayer, they will continue to seek out those with the deep pockets and the ability to pay. With financial institutions no longer the primary focus, these efforts will now concentrate on others.

This is also true with regard to regional regulations. It is important for the industry to view regulatory changes as merely a tightening up of environmental stipulation and an attempt to clear up the inequities. Although many view ECRA in New Jersey as the primary block in property transfers within the state's urban areas, it would be unrealistic to anticipate or expect its repeal.

New Jersey's governor and legislature have announced that they intend to redefine the scope of the law, but most have expressed their commitment to keeping ECRA intact. The changes will primarily focus on ECRA's scope, the provision of grants and loans to aid cleanups, a change in the financial mechanism for guaranteeing cleanups, and an allowance for limited sales of property subject to the law.

It is important to keep in mind that New Jersey's ECRA regulations have become a model for many other states, which are adopting similar legislation. As a matter of fact, property owners in New York City may realize the existence of a such a statute within their domain sometime this year.

The draft of a bill requiring environmental audits in property transfer is expected to be introduced in the city council sometime this summer. In many respects, the bill will mimic the provisions of a bill introduced several years ago in Congress by New Jersey Congressman Robert Torricelli.
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Title Annotation:Review and Forecast, Section V; pollution liability of commercial real estate owners
Author:Cohen, Ira
Publication:Real Estate Weekly
Date:Jun 24, 1992
Words:748
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