The Evolving Approach to Environmental Risk Management and Due Diligence company indemnification agreement in place, it is important to note that these agreements are often very limited in favor of the oil company. Legal counsel is required to ensure that all potential liabilities are covered. • “Comfort Letters”: In the event that an off-site property has caused contamination to the collateral, it may be possible to obtain a letter from the oversight agency known as a “comfort letter”. The purpose of a comfort letter is commonly to convey that the subject property owner will not be held responsible for the contamination caused by another party. It should be noted, however, that this often provides no release to the property owner from potential liability posed by a health risk to the building occupants as a result of underlying contamination. A health risk determination, as well as consulting legal counsel, should accompany the decision making process when a “comfort letter” is being used. • Insurance: Insurance policies may be available for specific concerns or previously closed issues, providing some protection against agency re-openers, for example. Policies may also be issued directly to the lender allowing the deal to proceed without further assessment work on a property. While this may allow today’s loan to close, it essentially “kicks the can down the road” for the environmental issue which ultimately will need to be addressed for a future purchaser. • Indoor Air Quality Sampling: In the case of an underlying contaminant plume posing a potential concern for indoor air quality, it may be tempting to jump straight to sampling the indoor air at a site. Cautions against such an approach include the potential for false positives caused by other environmental factors (cleaning products used in the building, general air quality in the region, etc.), which then lead to potential disclosure requirements to tenants for conditions that have not yet been verified by longterm sampling. Likewise, clean results do not necessary rule out the occurrence of vapor intrusion. Many consultants and the regulatory community consider sub-surface sampling data more appropriate to model the expected indoor air concentrations of a specific contaminants. . CRE Finance World Summer 2014 68 • Operations & Maintenance (O&M) Plans: O&M Plans are useful tools for managing ongoing concerns such as the presence of asbestos or lead in building materials at a property. These Plans outline the materials that have been identified, and proper procedures for the management of these materials in the maintenance of the property. It is critical that O&M Plans actually make it into the hands of the building engineers and maintenance staff at the referenced site in order for them to be effective. Conclusion Environmental due diligence is evolving along with the overall commercial real estate landscape. If the deal fundamentals are strong enough, certain environmental issues, especially those that can be quantified, may be overcome. With property values on the rise, many lenders and borrowers are willing to take on a property with environmental challenges as long as the risks can be managed within the overall deal structure. A creative, pragmatic approach can be achieved for many sites by taking the fear out of the environmental due diligence evaluation and focusing instead on the costs of the remedies and how they can be managed within the deal. In that light, the most difficult deals to do are the ones where the unknowns are undefined and difficult to quantify. The approach to environmental risk is also evolving in that liability for contamination entering a building structure can no longer be simply assigned to the off-site responsible party, but also resides with the property owner. Building owners and employers face liability and marketability concerns when their sites overlie contamination plumes, regardless of who is responsible for the release. For sites with these concerns, a Phase I ESA is often only the first step in identifying the potential liability. Next steps include modeling potential risks to occupants, subsurface sampling, and/or indoor air sampling, combined with legal strategy provided by counsel regarding disclosure requirements that may apply. A robust environmental risk management policy that incorporates these options ensures that the roadmap is available when the pressure is on to identify solutions and manage risk.
CRE Finance World, Summer 2014
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