Lending on
Contaminated Property: Changing Times?
Frank L Hearne
Mechanik Nuccio Williams & Hearne, P.A.
Frank L. Hearne
Bank of America Plaza Suite 3140
101 East Kennedy Boulevard
Tampa, Florida 33602-5151
Tel. (813) 909-7400
Fax (813) 909 8592
E-mail us at frank@hgn.com
This article appeared in the May, 2000, issue
of the FLORIDA SPECIFIER
In the environmental decades since 1980, obtaining loans on contaminated sites has been challenging to say the least. Institutional and other sophisticated lenders have been troubled by draconian law imposing strict liability for cleanup costs on owners and operators of contaminated property as well as other parties involved in such sites. Recent years, however, have seen a trend toward lending on many sites with environmental difficulties after a closely reasoned analysis and with recourse to the available risk management tools.
The federal Comprehensive Environmental Rehabilitation Compensation an Liability Act ("CERCLA") originated a scheme of strict, joint and several liability that was intended to draw in as large a group as possible to share in cleanup costs for contaminated sites. States, including Florida, soon followed suit with similar legislation at the state level.
Cleanup laws complicated real estate transactions for lenders in several ways. First and perhaps foremost, such laws holding owners liable for cleanup costs meant that borrowers, if faced with large costs, might become insolvent and unable to repay the loan. Secondly, it appeared possible that the lender, if forced to foreclose on contaminated property might be found directly liable to pay these often staggering costs. Finally, as the courts broadened the net of liability, it appeared possible that merely by holding the property as security the lender could incur liability. These factors and others lead sophisticated lenders in the 1980's to set up procedures to investigate properties for environmental liability and to deny loans where the risks was unacceptable. In turn, many believe that, because many properties could not be financed, they could no longer move in commerce.
Recent years, however, have seen several developments that have combined to encourage lending at least on certain types of sites. Environmental lawyers and consultants in several states indicate that lenders are by and large more winning to consider contaminated sites and to make loans where the circumstances represent acceptable risks.
In Florida, one very helpful factor has certainly been the state funded cleanup programs including the petroleum and dry cleaning solvent programs funded under Chapter 376, Florida Statutes. Many sites that have become eligible for these programs have been cleaned up or are awaiting cleanup when state funds become available. Although these programs do not prevent lawsuits by third parties for damages off site, the statutes contain an amnesty from lawsuits by third parties and local and state enforcement until the time that cleanup funds become available. This latter advantage was somewhat clouded in January by the case of Boyes ( see related article) in which a federal court held that a neighbor could bring suit under the provisions of the federal Resource Conservation and Recovery Act ("RCRA") to compel cleanup of a petroleum site in the Florida program because the RCRA scheme preempted the state amnesty against such suits. It remains to be seen how this case will affect transactions involving program sites. Further, access to the program has closed although sites that reported discharges in certain prior years are automatically eligible for the Petroleum Cleanup Participation ("PCP") Program merely by virtue of having reported the discharge in the past. We expect many owners will be pleasantly surprised to receive PCP eligibility letters as DEP completes the task of reviewing such sites.
Another helpful factor has been the willingness of DEP and EPA to provide "comfort letters" in certain types of cases indicating that the agencies will not seek to hold the buyer (or the lender should they be forced to foreclose) liable for cleanup costs. The most common form of such a letter is where the site is contaminated by an adjacent property and the owner can demonstrate, among other things, that there was no source of such materials on the property of interest.
The EPA "Lender Liability Policy" has also proved some degree of assistance. Initially passed as a rule, the courts held that EPA lacked the authority to impose the rule under CERCLA. Subsequently, in 1996, Congress essentially enacted the rule into law on its own. Although far from perfect, the policy is helpful in outlining how lenders should structure their relationship with the borrower and provides guidelines in the event of foreclosure which are helpful to avoid liability.
Florida statutes provide a limited exception for lender liability which does not go very far to comfort the lender and is inapplicable to the majority of sites. Section 376.308(3)(c), Florida Statutes, provides a very narrow defense for lenders in the event of petroleum or petroleum product contamination. It applies only to defendants who held a security interest in the site primarily to protect a loan and who meet certain other cirtirea. Such lenders must seek to sell, transfer, or otherwise divest the assets for subsequent sale at the earliest possible time. Also they must not have undertaken management activities beyond those necessary to protect its financial interest, to effectuate compliance with environmental statutes and rules, or to prevent or abate a discharge. If the facility is not eligible for cleanup under one of the programs, any funds expended by the department for cleanup of the property become a lien on the property against any subsequent sale after the amount of the former security interest (including the cost of collection, management and sale) is satisfied.
More recently, the availability of environmental insurance has become increasingly important in transactions, including making loans. One form of which we are aware is coverage purchased by the lender (at the borrowers expense) to repay the loan should the borrower be unable to repay the loan due to cleanup costs. Although this is helpful to the lender it should not be viewed as a replacement for environmental due diligence for a buyer because the environmental liability for site remediation will still remain with the borrower/owner. In addition, several insurers now issue environmental coverage to cover third party lawsuits, remediation and even overruns on contracted cleanup projects. We have found this type of coverage to be very valuable in structuring deals and we have found the insurers willing to negotiate on terms and conditions in connection with premiums which are affordable for larger transactions.
State and federal "Brownfields" legislation was conceived with the idea of offering financial and other governmental incentives for developers to undertake projects in urban areas where development has been hindered by the environmental conditions. These programs have had an impact on a limited number of loans because the incentives involved so far generally do not change the economics of a site enough in most cases to make a difference. In addition, procedures before local governments and the associated public hearings provide barriers of time, risk and expense. While these programs are important and will be increasing so, they have not as yet resulted in very many projects in comparison to the overall number of transactions underway.
These programs, however, have been helpful in at lease two ways in Florida by providing the impetus for other types of changes in the overall approach to contaminated sites. First, the "Brownfields" concept has been helpful in focusing interest on the economic consequences of leaving contaminated sites fallow, particularly the effects on job opportunities in the urban areas. Second, along with other pressures, the concept has helped move toward "risk-based corrective action" (or "RBCA".) Under RBCA, the idea is to base cleanup target levels upon realistic risk of exposure, rather than (at lease perceived) levels which were perhaps unreasonably strict. Presently by statute in Florida RBCA is applicable only to sites in the petroleum, dry cleaning solvent and Brownfields programs. Legislation is being introduced in the 2000 Legislative session which would make the RBCA approach applicable to all contaminated sites. In my view, it remains to be seen whether RBCA will result in more efficient cleanup or not.
Our discussions with environmental counsel and agencies in other states indicate that lender liability is being addressed more aggressively outside of Florida. For example, Pennsylvania and California law now provide much broader protections for lenders. In addition, private funding pools have been set up to address lending on contaminated sites and there are state subsidies for insurance coverage. We are reviewing these programs and will provide more information in future articles.
The factors discussed above combine to provide a more favorable climate for transactions involving contaminated sites, particularly in connection with loans. While some lenders remain blissfully unaware of the risks involved or, in the alternative, reject all risk without investigation, the mainstream of lending seems to be moving toward a case-by-case analysis that can result in a workable solution.
Frank L. Hearne
Bank of America Plaza Suite 3140
101 East Kennedy Boulevard
Tampa, Florida 33602-5151
Tel. (813) 909-7400
Fax (813) 909 8592
E-mail us at frank@hgn.com