Bucharest 2015 (C) Copyright 2015

Bucharest – 2015 (C) Copyright 2015


Environmental Risks Associated to

Property Transactions

Cicerone Ionescu, Ph.D

Managing Director

AUDITECO Global Environmental Services


Today’s Agenda

• Introduction

• Environmental risks

• How to manage environmental risks

• Case studies


Introduction


About AUDITECO GES

• Set up as an environmental audit and consulting firm in 1996

• Accredited by the Romanian Ministry of Environment and Sustainable Development for the:

– Development of Environmental Impact Assessments (EIAs)

– Development of Environmental Site Assessments (ESAs)

– Development of technical documentation for obtaining the Water Management

Authorization/Permit

• Mainly oriented towards the private sector and towards international clients

• HSEQ Integrated Management System implemented in 2004 and certified by TÜV Cert Germany

• Employer’s Liability Insurance and Professional Indemnity Insurance

• Projects developed in in Romania, The Netherlands, France, Hungary, the Republic of Moldova.

• www.auditeco.ro

http://www.auditeco.ro/


Relevant Experience AUDITECO has developed over 300 Phase I and/or Phase II and/or

Phase III EDD for property transactions in Romania, ordered by clients from Europe, USA and Asia:

AECOM URS Corporation ABLON Real Estate DB David & Baias Romania

ERM Central Europe Alianso Group Romania NESTOR NESTOR DICULESCU KINGSTON PETERSEN Romania

HPC Germany & Italy BLUEHOUSE Real Estate Popovici si Asociatii

LANDAMERICA Assessment Corporation Germany

CBRE UK Tuca, Zbarcea si Asociatii , Ro

MWH Global Belgium & USA Interprime Properties Romania AVIC China

PwC Romania & France ROSE Real Estate B.V., Holland BESTER Generacion, Spain

RAMBOLL ENVIRON SONNAE SIERRA Romania ACTAVIS – Sindan Pharma, Ro

WATERMAN UK Urbanscapes Development, Ro OMV-PETROM

Worley Parsons Spain VASTINT Romania McDonald’s Romania

TOYO Aluminium, Japan KUIBUS Architecture Firm, Ro Kraft Foods Romania


Environmental Risks


Environmental Risks Real Estate Priorities

• Environmental risks are directly related to human health;

• Human health has become one of the real estate priorities;

Environmental risks have become a real estate priority.

Definition(*): Environmental risk is the chance that the environment or human health

will suffer harm as the result of the presence of environmental hazards.

(*) www.smarte.org/smarte/resource/sn-glossary.xml

consequently

http://www.smarte.org/smarte/resource/sn-glossary.xml




Environmental Risks (I)

To the site (property)

To the management of acquisition (contracting)

Could be associated:


Environmental Risks (II)

• Liability for unknown historical pollutions (generated by on- or off-site sources)

• EPA’s reopening of previously closed pollution issues / files

• Releases or materials left behind by tenants

• Indoor Air Quality (IAQ) & Mold/Microbial Matter

• Buried surprises

Associated to the site (property)


Environmental Risks (III)

• Failure to identify/evaluate possible contamination on site

• Failure to properly locate underground pipelines, tanks or other utilities

• Unqualified or uninsured subcontractors

• Inadvertent releases of new contaminants during the acquisition or construction process

• Project management errors or omissions

Associated to the management of acquisition (contracting)


Environmental Risks are Financial Risks

• Because:

– The materialization of an environmental risk can incur major un-planned remediation costs;

– The materialization of an environmental risk can delay the project development (with serious financial consequences)

– The existence of an environmental risk increases the costs associated with the regulation of activities that can affect the environment / the human health;

– It is more difficult to obtain financing on sites that have environmental liabilities (actual / potential);

– Environmental risks can affect reputation and market position


How to Manage Environmental Risks


General Risk Management Approach

5 steps (*) 1. Identify and analyze loss exposures 2. Examine the feasibility of alternative risk management

techniques 3. Select what appears to be the best risk management

techniques 4. Implement the selected risk management techniques 5. Monitor the results

(*) Essentials of Risk Management, George L. Head and Stephen Horn


A Scale of Complexity

General risk management approach

Environmental risk management approach

Environmental risk management approach in transactions

More complex

Extremely complex


Environmental Risk Management Approach

More complex than the General Risk Management Approach

mainly because of the technical component of the environmental

issues


Environmental Risk Management Approach in Transactions

Still more complex mainly because:

• In transactions there are involved 2 parties (competitors) with different purposes and priorities;

In this approach the main differences are the following:

• risk analysis can serve other purposes in the transaction in addition to valuation and marketability;

• besides the complexities of the legal assessment, in a transaction one of the main issues preliminary to negotiation of the purchase and sale agreement is establishing the objectives of the 2 parties based on their environmental liability concerns.


How to Proceed?

Recommended Approach for Managing Environmental Risks

Identify and Assess Environmental Risks

Due diligence (Phase I, Phase II) , Risk Assessment

Risk Mapping

Avoid Risks

Change process or don’t buy

Manage Risks

Negotiate liabilities Due Diligence Phase III Implement remediation

measures

Develop appropriate EMS ( e.g. ISO 14001)

Transfer Risks

Env. Insurance Alternate risk financing


Environmental Insurance

Working Definition: A vehicle for transferring the financial responsibility

for certain environmental risks or costs.


What Environmental Insurance Cannot Do...

• Transfer Risk in Absence of Data

• Cover Risk in Perpetuity

• Directly Eliminate Balance Sheet Liabilities

• Pay claims related to Known Conditions

• Pay Costs Resulting from Voluntary Change in Use


Conclusions:

• Unmanaged environmental risks can slowly undermine a company’s financial stability

• Companies that properly manage their environmental risks can create competitive advantage


Case Studies


Case Study 1

Object of transaction: - 8.3 ha, Greenfield - Initial requested price: 10.5 mil. EUR Preliminary information: - No previous activities or constructions on site; - Clean aspect, no visible signs of contamination; - Industrial company located at the eastern limit of

the property, not active in the last 15 years. Environmental investigations: - Phase I EDD - Phase II EDD Main findings: - Significant contamination of the soil and of the

first aquifer on the eastern limit of the property - A former sludge lagoon located on the site of the

industrial company, currently covered by a concrete platform used as a parking place;

- Rough estimation of remediation costs (only for soil): 3.7 mil EUR

Final result of negotiation: acquisition failed


Case Study 2 Object of transaction: - 6.5 ha, urban Industrial site - Initial negotiated price: 78 mil. EUR Preliminary information: - No significant soil pollution resulting from previous

environmental studies (Phase I + II EB); - Visible signs of superficial soil contamination; - The owner ready to accept any environmental investigation

of the site paid by the buyer; Environmental investigations: - Phase I + II EDD Main findings: - Local significant pollution of soil and subsoil, with

petroleum hydrocarbons in several locations caused by undergrounds pipes and tanks;

- Surface and depth of contamination in the hot spots to be more accurately determined in a Phase III EDD

Additional environmental investigations: - Phase III EDD Additional findings: - Around 5,000 m3 of contaminated soil to be treated before

transportation to a non-hazardous waste landfill - Remediation costs estimated at around 700,000 EUR Final result: successful acquisition. Final price: 75.2 mil. EUR,

the buyer took over all the environmental liabilities

Bucharest 2015 (C) Copyright 2015

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