Commercial Real Estate Purchases and Sales: Environmental Issues

1. Commercial Real Estate Purchases and Sales:Environmental Issues Walter D. Cupkovic, Esq. Law Seminars International Advanced Real Estate Purchases and Sales March 10 and 11, 2008

2. New Federal Legislation • “All Appropriate Inquiry” Standards under CERCLA include: • Instituting requirements for environmental professional supervising the work • Interviews with • past and present owners, operators and occupants of the property, and • neighboring property owners for abandoned properties

3. New Federal Legislation • “All Appropriate Inquiry” Standards under CERCLA include: (cont’d) • Establishment of period of historical examination to its first uses • Examination of local, state and federal records

4. Phase I – “All Appropriate Inquiry” • U.S. EPA Rule effective 11/1/2006 supplement to ASTM E 1527-05 • Ten Mandatory Steps for Innocent Landholder CERCLA Protection • Requires 5 to 10 Days from On-Site Inspection • Identifies “Recognized Environmental Concerns,” i.e., potential liabilities

5. Phase II – Environmental Site Assessment • U.S. EPA and ASTM Standards for Characterizing Site Media, i.e., soils, groundwater, building materials, asbestos, radon, surface water, drainage, zoning, permits, PCB’s, air quality, mold, etc. • Operational Compliance Audit to determine any permitting issues & fines

6. Phase II – Environmental Site Assessment • Requires 20 to 60 Days from completion of Phase I • Identifies, Prioritizes and Costs Environmental Liabilities for both the Site and Operation on either a Stock or Asset Deal Acquisition Basis

7. Phase I – “All Appropriate Inquiry” • Environmental Inquiry / Investigation Performed by Qualified Professional • Visual Inspection of Property and Adjoining Areas, especially areas of chemical storage, use and waste management

8. Phase I – “All Appropriate Inquiry” • Interviews with Past and Present Owners, Operators and Occupants concerning environmental issues • Review of Historical Sources, i.e., aerials, deeds, zoning records • Review of Government Records, permits, waste disposal invoices

9. Phase I – “All Appropriate Inquiry” • Search for recorded environmental cleanup liens and agency notices • Consider “specialized knowledge” regarding the subject acquisition and surrounding properties • Consider relationship of purchase to fair market value of facility, if not contaminated

10. Phase I – “All Appropriate Inquiry” • Evaluate any commonly known information about the property and/or company • Consider the “degree of obviousness of contamination”

11. Visual Inspections – Seymour, CT Site via Google Earth

12. Obvious Natural Environmental Setting – Wildlife Refuge Since 1953

13. Degree of Obviousness –Sludge Lagoons $3.2MM

14. Weather Limited Observation – Vacant Site Due Diligence, Ohio EPA Inquiry

15. Better Weather Observation – Superfund $1.7MM Legacy Cost

16. Consider Specialized Knowledge – “All Tanks Leak”

17. Options for Dealing with Environmental Exposure • If Seller sells real estate in “AS IS” condition, and • Buyer releases and indemnifies Seller from environmental liability, • This is not sufficient to protect Seller from further environmental exposure

18. Options for Dealing with Environmental Exposure • Seller may have exposure for environ-mental condition of real estate to third parties, including • state and federal environmental agencies, and • private third parties

19. Options for Dealing with Environmental Exposure • Satisfactory contractual solution that mitigates exposure to Seller and Buyer • Phase One environ-mental assessment

20. Options for Dealing with Environmental Exposure • If Phase One discloses condition requiring further review or investigation • Phase Two environmental assessment obtained • If Phase Two identifies environmental remediation required • Estimated cost of remediation is determined

21. Options for Dealing with Environmental Exposure • If estimated cost of remediation ≤ baseline remediation amount • Seller performs required remediation • Undertakes measures to obtain a“no further action” letter or covenantnot to sue from appropriate governmental agency • If estimated cost of remediation > baseline remediation amount • Seller has right to terminate Agreement

22. Options for Dealing with Environmental Exposure • If Seller’s remediation of property completed after Closing, Buyer shall • give Seller access • not interfere with remediation process • not contribute to or exacerbate condition of Property

23. Commercial Real Estate Purchases and Sales:Environmental Considerations Walter D. Cupkovic, Esq. Law Seminars International Advanced Real Estate Purchases and Sales March 10 and 11, 2008

24. Case Study: Property Subject To Voluntary Remediation Plan (Seller)

25. Real Estate Agreement • Seller Perspective • Property Subject to Voluntary Remediation Plan

26. Buyer "Due Diligence" Contingency Period • 30 to 90 Days

27. "Due Diligence"/Buyer Termination Right • No land fills or similar impediments to Buyer's use/development • Engineering, drainage, soil and substrata conditions acceptable to Buyer • Environmental conditions acceptable • Buyer termination right during Contingency Period • Null and void (No!)

28. During the Contingency Period • Buyer, its employees, agents and designated representatives • Right to enter upon the Property • Prior notice to Seller • Representative designated by Seller • Conduct soil tests, borings, environmental, engineering, tests or studies

29. Buyer Indemnity • Defend, indemnify and hold harmless Seller • Liability, loss, claims, demands or damages • Buyer’s or its employees’, agents’ or designated representatives’ entry upon the Property • Survive Closing or Agreement termination

30. Buyer Remediation • Remediate damage caused to the Property • Survive Agreement termination

31. Insurance • Evidence of insurance • Liability for Personal Injury and Property Damage • Worker's Compensation • Seller as additional insured

32. Seller Deliveries (Seller) • Surveys, drawings, reports, tests or studies • Seller's possession • Seller makes no representations or warranties as to the correctness, validity or accuracy

33. Seller Deliveries (Buyer) • Confidential • Exceptions • Share with Buyer’s agents or designated representatives in performance of tests or studies • Agents or designated representatives agree to keep the information confidential • Court order or law • Agreement terminated, Buyer promptly return deliveries

34. Buyer’s Tests and Studies • Buyer's expense • Results confidential • Exceptions • Court order or law

35. Voluntary Remediation Program (“VRP”) • Seller and Buyer acknowledge that as of the Agreement Date • Contaminant releases on the Property ("VRP Incident Releases") • Disclosed to State Department of Environmental Protection ("DEP") • VRP Incident Remediation Plan developed thereunder between Seller and DEP ("VRP Incident Remediation Plan") • Remediate the Property • Regulatory standards for the continued commercial/industrial use ("Commercial/Industrial Standards")

36. VRP Incident Remediation Plan Compliance • Seller/Buyer obligations • Memorialized in Environmental Indemnity Agreement • Exhibit to Agreement

37. Environmental "Due Diligence”/ Seller Termination Right • Buyer’s environmental tests or studies • Identify releases on the Property • Not in compliance with Commercial/Industrial Standards • Non-VRP Incident Releases • Not identified in the VRP Incident Remediation Plan (“Non-VRP Incident Remediation”) AND • Estimated cost to perform the Non-VRP Incident Remediation > $500,000.00 AND • Buyer does not elect to terminate Agreement THEN • Seller right to terminate this Agreement, without liability

38. Seller Non-VRP Incident Remediation Obligation • Buyer's environmental tests or studies • Identify Non-VRP Incident Releases AND • Estimated cost to perform the Non-VRP Incident Remediation < $500,000.00 AND • Buyer does not elect to terminate Agreement OR • Identify Non-VRP Incident Releases AND • Estimated cost to perform the Non-VRP Incident Remediation > $500,000.00 AND • Neither Buyer nor Seller elect to terminate Agreement THEN

39. Seller Non-VRP Incident Remediation Obligation • Seller perform Non-VRP Incident Remediation • Comply with the Commercial/Industrial Standards • Undertake those legally required measures to obtain from DEP (IMPORTANT!) • Certificate of Completion and Covenant not to Sue c/k/a No Further Action/Remediation Letter

40. Seller No Non-VRP Incident Remediation Obligation • Buyer's environmental tests or studies • Identify no Non-VRP Incident Releases and no Non-VRP Incident Remediation • Seller no non-VRP Incident Remediation obligation

41. "AS IS" Transaction/Limited Representations and Warranties

42. Environmental Indemnity Agreement/Seller VRP Incident Remediation Plan • Seller and Buyer acknowledge • VRP Incident Releases • VRP Incident Remediation Plan developed • Between Seller and DEP • Remediate the Property • Commercial/Industrial Standards

43. Environmental Indemnity Agreement (Definitions) • VRP Incident Environmental Liabilities • Liability for VRP Incident Remediation Activities/VRP Incident Releases

44. Environmental Indemnity Agreement (Definitions) • VRP Incident Remediation Activities • Investigation and remediation activities • Install, operate, and maintain monitoring wells • Collect soil and/or groundwater samples • Measure groundwater levels in monitoring wells • Soil removal • Related assessment and remediation activities • Investigate and remediate VRP Incident Releases • In accord with the VRP Incident Remediation Plan

45. Seller Indemnity • Of Buyer • VRP Incident Environmental Liabilities • VRP Incident Remediation Plan Non-Compliance • Terminate upon completion of VRP Incident Remediation Plan AND • Certificate of Completion and Covenant not to Sue

46. Seller Insurance • Evidence of insurance • Liability for Personal Injury and Property Damage • Worker's Compensation • Buyer as additional insured

47. Seller Remediation • Remediate damage caused to the Property from VRP Incident Remediation Activities

48. Seller Agreement • Buyer not assuming • VRP Incident Environmental Liabilities

49. Seller Agreement • Complete VRP Incident Remediation Activities • Compliance with VRP Incident Remediation Plan • Secure Certificate of Completion and Covenant Not to Sue • Minimize disruption to Property

50. Buyer Agreement • Seller access to Property • Prior notice, except emergency • Limited purpose to complete VRP Incident Remediation Activities • Terminate upon completion of VRP Incident Remediation Plan AND • Certificate of Completion and Covenant Not to Sue • Exception: Periodic Groundwater Monitoring