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18A — April 24 - May 14, 2015 — Spring Preview — M id A tlantic
Real Estate Journal
E nvironmental
hen you are buy- ing or selling a c omme r c i a l o r By Stephen E. Fauer, Environmental Strategies & Applications, Inc. Closing real estate deals: Blending the skills of your broker, attorney & environmental consultant W required remediation to take more time. are often viewed as inordi- nate risk. That’s a powerful reason to resolve those issues early in the sale process.
or an individual, he normally delegates management to an outside attorney. There is no one “right” person or corpo- rate individual to serve this function, but someone should do it. This article provides: • an overview of how the environmental consultant, real estate broker, and attor- ney each work on a real estate transaction; • a look at real-life ex- amples of what can go wrong; and • recommendations for anyone involved in real estate transactions. OVERVIEW Within this article, let’s as- sume that you are selling an industrial property and have retained all three profes- sionals. Please note that the “trinity” is presented in the order in which (under most circumstances) you would engage them. The Environmental Consultant’s Role You want to sell. You know that a prospective purchas- er is going to perform due diligence prior to closing the deal. The last thing you want as a seller is for the buyer to know more about the prop- erty than you, so you engage the services of an environ- mental consultant to assess your property’s environmen- tal status. The big-picture question is this: are there any potential areas of concern that will raise a red flag for a purchaser and thus become a negotiating point at best or a deal-breaker at worst? Accordingly, you will want to know the environmental status of your property well before your realtor brings a deal to the table. The ultimate goal of the environmental consultant is to issue a clean bill of health for the property while con- forming to the environmen- tal regulations of the state in which the deal is taking place. In most instances the first step in the process is due diligence. Most due diligence requires 30 days to complete. And then more time will be needed if further study or sampling is required. There- fore, as the seller you should allow at least 60 days for your consultant to perform due diligence. And of course if the sampling phase reveals actionable contaminant lev- els, you should expect any
close the deal and collect his commission. And while fulfill- ing this objective, a reputable broker strives to foster and maintain long-term client relationships. These relation- ships are the backbone of ev- ery real estate professional’s career. Therefore, brokers will do everything possible to bring the parties together, answer questions, and resolve issues, all the while keeping their eyes on the prize: closing the deal. The best brokers know their markets. They know how to present and market the prop- erty. They know what other properties are available, the going prices, loan options, and other service vendors whom they can call upon to facilitate the process. The best and most successful real estate brokers posses a unique blend of knowledge, a coterie of coveted relationships, and savvy wrought through years of deal-making. In the end, the best brokers truly earn their commissions and enjoy special relationships with some of the largest and most influential property owners and deal-makers. The Attorney’s Role Attorneys are central to every real estate deal, pe- riod. Think back more than 40 years to a time before environmental regulations. Attorneys helped their clients negotiate deals on a regular basis when environmental issues were not a factor. Most real estate attorneys pos- sessed all the requisite skill and knowledge to negotiate almost any commercial or industrial deal. But that is no longer necessarily true. And regardless of your at- torney’s relative degree of environmental savvy, each attorney has a mission that is anchored by a few simple principles. First and fore- most, she must identify and mitigate legal risk for her cli- ent. When she negotiates the client’s contract she should negotiate a deal with terms that favor the client to the fullest extent practicable. And she must ensure compli- ance with applicable laws and regulations. While your at- torney knows that you long to close the deal, she may advise you to not close the deal if she feels that inappropriate or inordinate risk exists. Unre- solved environmental issues
In New Jersey, when reme- diation is at hand or when a property owner must comply with the Industrial Site Re- covery Act (ISRA), the con- sultant is required to enlist a Licensed Site Remediation Professional (LSRP) to re- view the consultant’s work and issue the Response Ac- tion Outcome (RAO). 2 To be clear, the LSRP is a second environmental professional that must be retained. They are the responsible party’s (in this context, the Seller’s) de facto case manager, a role for- merly filled by a New Jersey Department of Environmen- tal Protection (NJDEP) case manager. In order to issue a RAO, the LSRP is held to the most exacting certitude; LSRPs have zero room for latitude. Upon reviewing the consultant’s report, the LSRP will return the report to the consultant if he finds even one deficiency, requiring that the deficiency be remedied prior to issuing the RAO. Sell- ers therefore should not look to the LSRP to advocate on their behalf. Almost all ideas, strategies, and conversations will issue from the consul- tant and other members of the project team. The LSRP remains independent. Your environmental consul- tant should advocate on your behalf. This means exercising as much creativity as possible while still conforming to the regulations. As the environ- mental industry has matured and the regulations have changed in accordance with new facts and findings, the degree of latitude available to consultants has diminished. Environmental Strategies & Applications, Inc. (ESA) does not claim that oppor- tunities for advocacy will be identified on each project. But ESA promises to examine the avenues for latitude on each project. And when we iden- tify an opportunity to make a choice due to latitude, the outcome often reduces time and costs, and brings the deal to closure sooner. The Real Estate Broker’s Role When the property is free (or almost free) of environ- mental issues, you will then actively engage your real estate broker. It may sound glib, but the broker wants to
i ndu s t r i a l p r o p e r t y 1 , or seriously considering doing so, it is probable that you will retain what I call the “holy trinity” of the
Cautionary Tales or, What Can Go Wrong While the project manager is busy managing the trin- ity, perhaps their greatest challenge is to manage time. The importance of timely, informed decisions cannot be overemphasized. As stated earlier, the project manager gathers, distills, and synthe- sizes information, ideas, and suggestions so the client can make informed and timely decisions. A deal moving for- ward tends to keep moving forward. Deals at rest tend to die. Environmental issues scare people and routinely ruin deals, especially among those clients who are not envi- ronmentally sophisticated. Suppose a seller puts her commercial property on the market for $1.5 million, and then learns of an environ- mental issue. If she and her attorney are fearful or misin- formed, they may decide to let the buyer handle the cleanup and reduce the price of the property far below the cost of remediation. As stated before, deals can be lost when sellers fail to perform due diligence. Deals often blow up when buyers discover environmental prob- lems via the due diligence process that had been previ- ously unknown to the seller. At this point, the broker scrambles and the attorney may act defensively instead of strongly negotiating terms. This is a precarious position for any seller. RECOMMENDATIONS Determinewhowill man- age the deal process. Large corporations and developers employ CFOs and they often have in-house counsel. Either individual could assume the role of project manager. Just be certain that the selected individual is familiar with real estate issues. Do they know what it takes to bring a deal to fruition? Do they have clear and ready access to the prop- erty owner? Decisions must be made in a timely fashion. Stay we l l informed throughout the process. Some real estate deals are complex and have a bewilder- ing array of moving parts. continued on page 24A
Stephen Fauer
real estate deal: a real estate broker, a real estate attorney and an environmental consul- tant. Here are three profes- sionals who are retained to represent your best interests. As the client, you ostensibly say to the professionals, “You are on my team to help me close this deal.” But each pro- fessional has a different set of rules and guidelines he must follow, so although each one is playing on your team, he may not necessarily consider the other guys his teammates. In fact, in this complicated game, some of the rules each member of the team may fol- low openly conflict with one another. And that can cause problems, delays, or even nullify the deal. (Members of the trinity know that deals are lost more frequently than anyone would like to admit.) One way to keep deals mov- ing forward is to know your players—their skills and limitations—and the special- ized rules that govern their behavior. To minimize the likelihood of each professional operat- ing at cross purposes to one another and maximize the likelihood of closing the deal, someone needs to become the project manager to monitor each professional’s actions and—perhaps even more important—to smoothly in- tegrate findings, actions, and communications and ultimately, to facilitate the process. The project man- ager gathers information and suggestions from the trin- ity, synthesizes it, and fun- nels it to owner. The project manager knows that lack of information and indecision are all potential deal-killers. When the client is a major corporation or large-scale real estate developer, the project manager may be a principal, their inside corporate coun- sel, or their Chief Financial Officer (CFO). But when the client is a smaller company
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