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Podcast Notes:

Larry Schnapf (Environmental Attorney)
Visit Larry’s website at http://www.environmental-law.net.

Alan R. Grosheider (CEO of Blue222)
Visit Blue222.com to learn how we make nationwide due diligence as easy as ordering from Amazon!

In this podcast interview, Alan Grosheider interviews Larry Schnapf. Larry’s boutique environmental law firm has expertise in environmental issues associated with Corporate and Real Estate Transactions, Complex Commercial Financing, Environmental Due Diligence, and Brownfield Development.

Alan:
President Trump signed a broad executive order that’s primarily aimed at promoting the use of coal and slowing Obama-era efforts to reduce America’s greenhouse-gas emissions.

What effect, if any, will the Trump administration have on environmental due diligence. Do you feel that the lenders may see this as a sign to worry less about thorough due diligence?

Larry:
Not necessarily. Most federal laws are delegated to the states. From a practical standpoint, there won’t be a significant impact in due diligence. There may be less concern with corporate enforcement. However, it appears that the federal government will rely more on states for enforcement.

With regard to Superfund, EPA Administrator Scott Pruitt is a very strong supporter of brownfields, and there is strong support in Congress. So brownfield work likely will increase. In fact, there are two bills under consideration that would provide more liability protection for municipalities and make brownfield grants more flexible.

Brownfield funding has gradually reduced in recent years for sites with no responsible parties. However, for sites with assigned responsible parties, the projects should proceed.

Alan:
So does it appear that with these changes it will become easier for a brownfield project to be approved and proceed?

Larry:
The federal brownfield programs are grant programs. In addition, liability protections were developed to allow those who wanted to develop sites to be protected. Unfortunately, the courts have muddied up Bona Fide Prospective Purchaser Defense (BFPPD). The BFPPD was created to protect purchasers of real property from environmental liability, even when they knew the property was contaminated.

To achieve BFPPD was made to be fairly easy. You complete a Phase I Environmental Site Assessment, and you show no affiliation with the party responsible for contamination. However, after taking title, you have to take appropriate care. This is where courts often have ruled that the purchaser lost their BFPPD because they failed to take actions recommended in a Phase I.

To avoid this concern, a Phase I should be sufficiently thorough to allow the purchaser to know the steps required to maintain appropriate care; however, the Phase I should not list specific recommendations. Banks normally require recommendations. However, those recommendations may be the cause of the loss of BFPPD, if the purchaser does not adequately follow the recommendations. It is advisable for the consultant to send recommendations to the purchaser in a separate, private letter that is not considered part of the Phase I for the purposes of achieving BFPPD.

Alan:
So to clarify BFPPD, the defense allows you to perform your Phase I due diligence, identify specific recognized environmental conditions, and complete your purchase with protection from Superfund liability. So you’re saying that if the Phase I makes specific recommendations, you’re at more risk of losing your BFPPD if you happen to miss completion of any recommendations?

Larry:
Yes, after you take title, you can lose BFPPD, if you don’t take appropriate action with respect to existing contamination at the site, such as stopping ongoing releases and preventing human exposure. This is where vapor intrusion can come into play. Purchasers need to be aware of this protection to facilitate projects; however, they need to be aware that they can lose the protection, if they’re not careful.

Some EPA regional offices are listing the specific steps required to maintain BFPPD when they enter into a BFPPD agreement. Some states, like Michigan, do a great job of requiring specific steps to be identified prior to the BFPPD agreement.

Alan:
So, if a property purchaser wants to utilize BFPPD to purchase a property, it is important for them to get a great consultant and great attorney, work together to complete a Phase I with no recommendations, and, if possible, nail down the specific steps required to maintain BFPPD with the regulators prior to completion of BFPPD agreements.

Larry:
Yes, most of the time, you’ll work with state regulators who will require an investigation, a remedial action plan, and then provide a no further action letter. That generally will be sufficient with respect to federal Superfund protection. Everyone involved needs to be careful to understand why they are doing due diligence. For example, in New York, if seller gets a “clean” Phase to market their property, they may prevent a buyer from utilizing BFPPD to purchase the property and qualify for a cleanup grant. In New York, the brownfield program actually will pay part of your build-out costs, in addition to your cleanup costs. So, the program is very much in demand.

Alan:
So, in the next 10 to 20 years, do you still see a lot of remaining brownfield opportunities out there?

Larry:
I can’t predict 10 years out, but, clearly, our society is placing more and more value on urban areas, and there are a lot of contaminated urban areas. I think brownfields will continue to be a powerful economic tool for development to attract capital and opportunities.

Alan:
I always felt that brownfields are opportunities that a lot of developers and lenders miss out on due to being overly cautious. However, if you have a bit of risk tolerance and the right team, brownfields can be a fantastic opportunity.

Larry:
Historically, lenders and developers have been concerned with contaminated properties. The other extreme is that parties will overlook or downplay real environmental issues. I see this a lot recently with dry cleaners. People just don’t appreciate the potential for contamination from dry cleaners. For a small business, dry cleaners are like having a mini factory on your property in terms of potential contamination. Historically-closed underground storage tanks also are a huge concern because their closure often doesn’t meet today’s standards.

Often now with the tax credits offered in New York, the tables have turned. In the past, developers would argue that a site is clean, and the DEC would argue that it was contaminated. Now the developer often is arguing that the site is contaminated, and the DEC is arguing that it is not.

Alan:
Is there anything coming up that due diligence consultants and attorneys should be learning about?

Larry:
We have the issue of Emerging Contaminants (ECs). In New York PFOSs and PFOAs are of growing concern. They’re usually used in Teflon and also firefighting foam. People now are suddenly finding themselves with contaminants on their properties that no one ever looked for in the past.

A good Phase I requires a very good historical investigation about all the uses of the property, what tanks were there, finding past records of environmental issues and cleanup, what the proposed use will be, and if the new use require any special permitting, etc. From a legal perspective, it’s also important to determine any corporate liabilities from the past and who’s responsible. A quick review of the property and a database search doesn’t cut it. Unfortunately, lenders are pushing prices down and expecting more from consultants.

In one particular subset of lending: Commercial Mortgage Backed Securities (CMBS), it’s important for consultants who don’t know the CMBS market to realize that the investor who purchases the “B piece” is a very important consideration. This is the lesser rated portion of a portfolio. If there is a default, they will take the first hit. So they may scrutinize the environmental issues more closely.

So emerging issues include dry cleaners, ECs, historic issues that haven’t been adequately evaluated, and evaluating business risk for future property use. Phase Is are not a scientific study, it’s a combination of legal and technical. So you need consultants and legal advice from people who are practical from a business sense. You have to understand the constantly changing state laws.

Vapor intrusion also is a very important topic to understand with lots of local variations. So, you need advisors who really understand all the local nuances.

Alan:
Would you like to give any final plug for your firm and services?

Larry:
Well, I’ve been an environmental lawyer for 33 years now, and my practice has always been focused on the transactional side of things. So, my practice focuses on brownfields, corporate transactions, lender protections, etc.  I used to work for a larger firm, but I went out on my own to better serve my clients. It’s fun, and I love what I do. I can be cost effective and provide clients with real value.  My website provides a lot of free articles and information. I also have a LinkedIn group called Environmental Issues in Business Transactions where I post lots of useful information. Join the group to stay up on the latest environmental issues.

Alan:
Yes, I’m a big fan of LinkedIn these days. I appreciate you coming on and helping educate some listeners and look forward to having you back on in the future as we think of other issues that would be helpful to commercial real estate and due diligence professionals.

Larry:
Thank you, I’d love to come back on the podcast again, and look forward to your future LinkedIn posts and podcasts.

 

Visit Blue222.com to learn how we make nationwide due diligence as easy as ordering from Amazon!

Music Credits:
“Cold Funk” Kevin MacLeod (incompetech.com)
Licensed under Creative Commons: By Attribution 3.0 License
http://creativecommons.org/licenses/by/3.0/

EnviroTech Summit 2017

If you haven’t signed up for this yet, it really looks like a fantastic event.  It’s SO important for our industry to embrace technology to become more efficient and make our jobs more efficient, fun, and profitable!

Event website: https://envirotechsummit.org/

I was asked to speak about the use of technology in the engineering/environmental fields, so I and other Blue222 folks will be attending.  I haven’t been to previous meetings, but I’ve heard great things.  I’ve also heard the facility is spectacular.

Sign up here: https://envirotechsummit.org/tickets/

From their website:

LEARN about how other professionals like you are applying smartphone technology, Internet of Things ideas, drone technology, remote sensing, and other cutting edge technologies to solve environmental problems.

DISCOVER the latest apps, smart IoT devices, mapping technologies, drone use cases, autonomous field data collection systems, reporting automation, and other tools.

CONNECT with environmental professionals, app developers, and hardware engineers to learn and create solutions for your projects!

EARN CREDITS – Attend and get 8+ hours of Professional Development Hours (PDHs).

I hope to see you there!

Alan R. Grosheider
CEO, Blue222

Am I missing something, or are engineering and environmental firms way behind in the use of technology to improve their businesses?  In 2011, entrepreneur and venture investor Mark Andreessen posted an essay titled “Why Software is Eating the World.”  The essay discusses how companies like Amazon.com are dominating traditional businesses like Borders and that for the foreseeable future, software-based companies are going to change the way the entire world works.

 

This article is proving to be true, and the message is just as relevant today as it was in 2011.  Companies like Uber and Airbnb are dramatically changing the way we function in the world.  So why have engineering and environmental firms not kept up pace?

 

It seems logical to expect that engineers would be on the forefront of using the latest and greatest technology in every aspect of their company to improve efficiency and cost-effectiveness.  But, in my experience, that isn’t the case.  In fact, it appears to be the opposite.  Engineering firms have been incredibly conservative about embracing change and technology, often continuing to do things “the way we’ve always done it.”

 

This is not going to last for long.  If you haven’t read the book The Third Wave by Steve Case, founder of AOL, I suggest you check it out.  What is the Third Wave?  The First Wave was the Agricultural Revolution.  The Second Wave was the Industrial Revolution.  The Third Wave is the Information Age, and we’re still in the early stages.  Web 1.0 consisted of building static pages and websites.  Web 2.0 included online stores and improved efficiencies such as Amazon.com.  Web 3.0 will be the connection of everyone, a dynamic sharing economy, and rapidly accelerating efficiencies.  Companies like Uber already are recreating how significant parts of the economy operate.  EVERYTHING will be Uberized.

 

In addition, sensors will be placed in every device or product you can imagine.  These sensors will be connected to the Internet.  And, the amazing amount of information collected from these sensors will lead to endless business possibilities.  Imagine, for example, that your “connected” contact lenses instantaneously scan the food you’re about to eat and tell you if the meal is within your calorie goals for the day.  Your clothes have tiny micro sensors throughout, which track every conceivable detail about your health and fitness in real time.  If any signs of health concerns are detected, your “smart clothes” immediately connect with your doctor and a vast database of healthcare knowledge, and suggests a remedy to correct the issue before it even comes close to becoming a problem.

 

This type of connectivity may sound scary to some people, but it’s on the way.  To build a business with this kind of complexity sounds like way too much to ever consider.  However, it won’t require someone to build the whole thing.  Every business will be an interconnection of many smaller businesses that work together, all doing their small part.  Building a businesses that fits into this jigsaw puzzle won’t necessarily require millions of dollars.  For example, my daughter’s boyfriend and a couple other guys recently rigged a big rubber duck with sensors and cranked out some software that allows the duck to float around a lake and monitor all the environmental conditions in real time.  (Apparently, the United Kingdom government already is in discussions to purchase the technology from them!)  This type of technology could work in conjunction with all sorts of businesses and government projects to clean up streams, lakes, and oceans around the world.

 

So what’s going on with engineering and environmental businesses?  Why are we behind when it comes to technology?  My guess is the perfectionism and risk aversion of us engineers and scientists.  Our job is to keep our clients safe, design things that are safe, and generally keep things from blowing up.  This leads to a mentality that is slow to change.  If we know something works, that is safe.  Doing things the way we’ve always done them is safe.  However, if you consider companies like Kodak, you’ll see that, eventually, not changing will kill you.  Their engineers invented the digital camera.  However, they feared it would cannibalize their film business, so they didn’t pursue it – leading to their bankruptcy.

 

So what technological changes are happening in the engineering and environmental world?  I’d love to hear of anything interesting that you know of.  As for myself, I’ve spent 25 years in the environmental due diligence business.  Now I’m now leading a company called Blue222 (blue222.com).  We’re “Uberizing” the business of Phase Is and other due diligence services.  The system makes it quick and easy to search for, review, and hire independent environmental contractors all over the country – when and where you need them.  The system also makes it easy for independent environmental contractors to sign up and receive work from larger firms and banks.

 

Why is it important to Uberize the industry?  Because there is a tremendous amount of INEFFICIENCY.  I see so many independent environmental contractors running themselves ragged, accepting jobs all over the country and traveling constantly, just to make ends meet.  Wouldn’t it be nice if all of that work was distributed evenly?  In other words, if it was easy for hiring firms and banks to find the best quality independent consultants in a location close to each of their job sites, travels costs would go down dramatically, and the independent consultants would make a lot more money with a lot less work hours.

 

I firmly believe that these changes are inevitable in every industry.  Over the next 20 years, we’ll see the Uberization of everything that can be Uberized.  I’m excited to be on the forefront of it in our industry and look forward to seeing how we can make everyone’s jobs easier and more profitable!

 

Alan R. Grosheider
CEO, Blue222

 

Why do prices vary so much in the environmental site assessment business?  Is it a “you get what you pay for” business?  Does a huge price tag mean greatly superior quality?

Generally, the price difference is due to over overhead. To explain I provide the following examples.

Company A: Company A is a one-man shop owned by a person we shall call Joe.  Joe started his company 10 years ago.  First, let me explain one-man shops.  One-man shops typically do not consist of entry-level consultants but usually consist of professionals that are seasoned and have been in the industry for 10, 15, or more years.  These are generally experienced professionals who have worked for other companies, such as Company B (see below) for many years, if not decades.  After many years, Joe decides he wants to be his own boss, make his own hours, and reap more monetary rewards for all the hours he works.  So Joe leaves Company B and starts Company A, which he operates out of his home.  As a client, hiring Joe is not a bad idea, as Joe now has 20 or 30 years of experience overall.  However, there are some scenarios where hiring Company A can be less advantageous than hiring Company B.  For one thing, even seasoned professionals don’t know everything.  At Company B, professionals have coworkers to bounce ideas off of and get second or third opinions for complicated situations.  Secondly, since Joe is a one-man shop, there are no senior reviews conducted on his reports before he submits them to the client, which allows for a greater margin of errors.  Thirdly, if Joe retires or goes out of business for other reasons, a client cannot go back to Company A for an update to the report, a reliance letter, a copy of the report, clarification on anything, etc.  Fourthly, since Joe is a one-man shop, he does not have the ability to conduct large portfolio jobs in a timely manner or the ability to conduct many jobs spread across various areas of the U.S.

But getting back to my original explanation…Company A has very minimal overhead.  So Joe charges $60.00 per hour for professional services; a lower rate than a seasoned professional with 30 years experience at a larger firm.  Joe spends 16 hours on the report, spends $400 on the regulatory database and historical data, and has only $75 in miscellaneous expenses.  This brings the total to $1,435.

Company B: Company B is a large corporation with many offices throughout the U.S.  The company has entry-level professionals, mid-level professionals, and senior-level professionals with a broad range of experience and capabilities.  As a client, yes, hiring Company B is more expensive (see below).  However, for many reasons, including the four above, Company B offers a broader range of capabilities, experience, and ability to get various jobs done in a timely manner across the U.S.  Company B also has been in business for 35 years, and it is highly unlikely the company will close its doors anytime in the near future.

So Company B’s costs are higher.  The costs could be as follows: Tom is a mid-level professional and conducts the Phase I at $85.00 per hour.  Tom has 15 years experience and is billing at a reasonable rate.  Tom spends 16 hours on the report, as did Joe.  Tom’s administrative staff spends two hours setting up the job, invoicing, and finalizing the report at $25.00 per hour.  The regulatory database and historical data costs Company B $300.  Company B gets a better price from the database company due to the volume they order.  However, Company B marks up all vendor invoices 15% for overhead; making the total for that service $345.  Tom has Jane conduct a senior review of his report.  Jane is a senior-level professional billing $110.00 per hour.  Jane spends two hours reviewing Tom’s report for a total of $220.  Miscellaneous expenses are $200, as Tom’s office was not as close to the site as Company A’s office and Tom had to travel farther.  This brings the total to $2,175 before additional overhead costs that Company A must allocate to their corporate office.

So, while Joe and Tom provide an equally high quality report, the costs vary greatly.  Essentially, the client will need to decide what factors are most important regarding particular transactions.  This may include total cost, the need for a company that can conduct a variety of projects if the Phase I leads to the need for additional work, the need to utilize a company that can handle higher volumes of work, or the need to utilize a larger company that will likely be in business for years to come.

Photo Credit: https://pixabay.com/en/confused-hands-up-unsure-perplexed-2681507/