Time for Good Buys:Time for Good Buys:Acquisition Due DiligenceAcquisition Due Diligence

December 2nd, 2010December 2nd, 2010

Daniel Spandau Daniel Spandau

Senior ConsultantSenior Consultant

DJS Consulting Inc.DJS Consulting Inc.

David H. Quigley

Agenda

Re-IntroductionsThe Real Estate CycleEnvironmentally Challenged

Properties– Should you or Shouldn’t you?– Incentives

Financial Regulatory

– Due Diligence

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Reintroductions

David Quigley

Akin Gump Strauss Hauer & Feld, LLP

1333 New Hampshire Avenue, NW

Washington, DC 20036

202.887.4339

dquigley@akingump.com

www.akingump.com

www.ClimateIntel.com

Daniel Spandau

DJS Consulting

22258 Waterside Dr.

Boca Raton, FL 33428

561.239.0090

dspandau@officerx.biz

www.PBSdocs.com

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The Real Estate Cycle

Some Signs of Recovery Below-Market Opportunities “Environmentally

Challenged” Real Estate– Informal Poll of Share Group– Should You or Shouldn’t You?– Buy or Sell?

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Incentives

State and Local Government Programs– Redevelopment Grants (NYC)

$10 Million in Grants over 2 Years Database of 3,000 Brownfields

– Up to $140,000 per Property– Fund Phase I and Phase II Assessments

– Tax Incentives (NJ, PA) Rebate of Cleanup Costs (75%) That Increase Revenue Reimbursement of Other Remediation Costs (50%) Tax Credits for New Employees at Remediated Sites

– “Comfort” Letters

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Incentives (Cont’d)

Federal– Audit Policy

Waives Penalties for Pre-Purchase Non-Compliance

Waives Economic Benefit Penalties

Gives (At Least) 45 Days to Report

Ignores Purchaser’s Prior Violations

– Onus on Due Diligence

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Due Diligence – Why?

CERCLA, CERCLA, CERCLA What CERCLA Does…

– Removal or Remediation at a Facility; or– Reimbursement of Removal or Remediation Costs Incurred by Third

Parties or Governmental Entities …To Whom

– Current Owner or Operator;– Owner or Operator at the Time of Disposal;– Parties That Arranged for Disposal at the Site

What CERCLA Does Not Do– Petroleum– Still Need Due Diligence for Incentives– Petroleum Release Reporting Requirements Similar in Any Event

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Due Diligence – Why?

Defenses to CERCLA, Similar Liability Limited

Strict Liability Statute

– Act of God

– Act of War

– Act of Third Party

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Due Diligence – Why?

Establishing the Third Party Defense

– Defense Easily Abused (“Past Owner Did It”)

– Congress Limits Defense

Act of Third Party Not a defense if:

– A Contractual Relationship Exists Deeds or Land Contracts

Leases

– Unless “Innocent Landowner”

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Due Diligence – Why?

Key: Establishing Who Is Innocent Landowner

Pre-Acquisition:

– 1) Purchaser Did Not Know of Contamination at Purchase

– 2) Purchaser Had No Reason to Know of Contamination

Post-Acquisition

– Purchaser complies with any land-use restrictions

– Purchaser takes “reasonable steps” to prevent releases

– Purchaser cooperates with regulators

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Due Diligence – How?

Pre-November 1, 2006:

– ASTM Standard E-1527-00

– Phase I Assessment

Generic Environmental Consultant

On-site Inspection for RECs

“Attempt” to Interview Owner, Manager, Occupants

Review of Federal, State Environmental Databases

Review of Uses Back to 1940, or Earlier

Report Valid for Six Months

No Real Requirement to Fill Data Gaps

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Due Diligence – How Now?

As of November 1, 2006:

– All Appropriate Inquiry Rule

– New, more stringent requirements

Apply to Consultants; and

Add Requirements for Purchaser Herself

– New ASTM Standard E-1527-05

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Due Diligence – Who?

Purchaser

– Obligations Don’t End with Hiring of Consultant

– Search Environmental Cleanup Liens– Apply Specialized Knowledge of the Site, Area– Assess Purchase Price

Is It Market?

If not, Is It Because of Environmental Contamination?

– Provide Results to Environmental Professional

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Due Diligence – Who?

“Environmental Professionals”

– Increase in “Judgment Calls”

– Requires Greater Qualifications

– Written Report Must Certify EP Has:

State Engineer/Geologist License + 3 Years Experience

B.S. + 5 Years Experience

10 + Years Relevant Experience

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Due Diligence – What?

On-Site Investigation

– Subject Property; and

– Adjoining Properties (from the Property Line)

Consider Conditions Indicative of Release

Fill Data Gaps

Records Review, Phase II

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Due Diligence – What?

Must Interview:– Current Owner;

– Current “Major” Occupants;

– Site Managers;

– Past Owners, Operators, Occupants (Employees?);

– Neighboring Owners (If Land Abandoned)

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Due Diligence – What?

Records Review

– Federal and State; and

– Tribal and Local

– Search to Time Site First Contained a Structure

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Due Diligence – When?

Report Must Issue within 1 Year of Acquisition

– If Expires Pre-Close, Update

– Certain Elements Require Update Every 180 Days

EP Certification;

Interviews;

Government Records; and

Visual Site Inspection

– Effectively a 6-Month Window

Due Diligence – Lessons Learned

Choose the Right Consultant

– How Much AAI is Too Much?– To Phase II or Not Phase II?

Wrong Consultant? Choose the Right Attorney– Case Studies in Overzealous Diggers

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Investigation

Phase I– Identifications of REC’s– Consultant needs to:

Alert client to all major issues Be familiar with industry/industrial process Evaluate Phase II requirements

– Consultant has potential liabilities – Third party review – client attorney privileged

Investigation cont.

Phase II– Cost factor– Time constraints– Who is the information for– Alternative methods of investigation

Start to dig or search for more paperwork Probe or Scan Testing methodologies

– Seller agreements

Third Party Review

Client attorney privileged communication– Develop SOP– Develop cost matrix– Qualify contractor– Draft report to attorney– Review of report completeness – Review of REC’s– Recommendation

Determination Factors

Assessments equality factors– Buyer

Single property Portfolio Seller

– Banker Lender Foreclosurer

Case Study – Risk + Agreement

Oil Company– Package of ~ 400 locations– Time constraints to close deal– ~ 60 locations with possible REC’s

Contractual agreement with seller Saving of $5 - $15,000/per location in investigations

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Case Study – More paperwork

UST – Emergency generation– Installation review– Records management– Fuel Throughput– Testing– REC - $10-15,000

More then the potential cleanup (if ever necessary)

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Case Study – Reasonability

Office Complex– REC – close proximity to residential dump area – Apparent data suggest Limited Phase II

More in-depth informational review– Depth to Water ~5 ft– Dump has been inactive to ~15 yrs.– Dump is no longer evident – currently parking area– Lots of soil movement

No additional investigation recommendation $10-15,000 savings

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Case Study – What data

Industrial Process– REC – collection of soil and water samples– Collecting and analyzing data

State regulated sampling and analysis Informational assessment

– Cost differential - $5-10,000

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Case Study – Contractor Expertise

Industrial Process– Phase I review was limited

Contractor was not familiar with potential concerns

– Review identified additional sampling and analysis that was necessary to protect client

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Case Study – Property Managment

Warehouse and light industrial complex– Company property manager requested a review– Consultant identified a variety of REC’s

Estimated investigation and expected remediation– >$500,000

There were no Federal, State or Local request for investigations

Previous investigations were all in compliance Background levels were negotiated as acceptable

– Recommendation – no additional work needed

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