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SBA Topics: Internal SBA Evaluation of Reports and New Contaminated

Property Lending Approach in Michigan

ONE$COMPANY,$MANY$SERVICES

CONSULTING ECONOMICENVIRONMENTAL

Prepared'for:'EBA'Date:''January'16th,'2016

Why Michigan?EDR Scorekeeper summary of the number of transactions conducted in the Midwest. Special thanks to Dianne Crocker, Principal Analyst, EDR Insight, for compiling these exclusive statistics.

Yes Michigan!! In the third quarter of 2015, Michigan grew at an annual rate of 2.9%, which

was faster than the overall US growth rate of 1.9% (U.S. Small Business Administration)

! Number 5 in the US for most private job creation (Bureau of Labor Statistics)

! 2nd most improved economic health (Bloomberg Business)

! From 41st to 6th in Entrepreneurial Climate (MiQuest)

! Over $12 billion have been invested in commercial, industrial & residential properties in Detroit since 2006. (University of Michigan Report). Of $49.5 Billion in U.S. auto investment $18B is being invested in Michigan

! Unemployment rate has fallen dramatically from 14.2% to 5.5% in June 2015 (MI Bureau of Labor Market Information & Strategic Initiatives)

! State will add an average of 45,800 jobs per year in 2017 & 2018 (University of Michigan Report)

SBA SOP 101: “The Basics”

The$following$information$is$

assuming$that$through$the$

completion$of$the$SBA$due$

diligence$process,$contamination$

was$identified$and$next$steps$are$

required.

Mitigating FactorsSBA will rely upon one or more of the following factors when deciding to disburse before completion of remediation or monitoring:

" Indemnification - No changes can be made to indemnity language" Completed Remediation - Remediation complete and only monitoring required. Must

have 1 year of results, no increases, maintaining due care" No Further Action - Michigan – NFA, or completion of a BEA with an Affirmed DDCC

or Response Activity Plan can substitute" Minimal Contamination - Extent of impact and costs of remediation are de minimis

in relation to property value, and remediation done within 1 year" Clean up funds - Approved by LUST Trust funds, DC programs, etc. and amount

allocated is sufficient" Escrow Account - 150% of cleanup/closure costs; controlled by lender/CDC; can only

be used for remediation; source of escrow can not be part of SBA loan proceeds" Groundwater Contamination Originating from another site - Migration

exemptions in State regulations" Additional or substitute collateral" Other Factors - Environmental insurance, CNTS exist, Engineering controls exist.

Must have clearance for SBA Environmental Committee

Small Business Administration SOP 400“Houston….We've Got a Problem”

! New Jersey has ISRA and LSRPs! Connecticut has LEPs! Massachusetts has LSPs! Michigan has Baseline Environmental

Assessments with Documentation of Due Care Compliance (BEA/DDCC) and Response Activity Plans (ResAP).

! Big difference is that all other states have high technical experience/educational requirements –Anyone can prepare a BEA.

! HOW CAN THIS BE AFTER THE FLINT WATER CRISIS?

What in world is this BEA thing everyone keeps talking about in Michigan?

Is this FAKE NEWS?

It is true!

And how many of these have been completed since the law passed?! Almost 22,000 (21,794 as of January

10, 2017)Based upon these technical requirements to prepare (NOT), how many do you think are bare bones garbage?! No stats on this. Let’s just say “A LOT”

What in world is this BEA thing everyone keeps talking about in Michigan?

! NO statute language here

– In short, this 1995/1996* law allows a buyer/user to draw a line in the sand (establish Baseline contamination) of impacted residual soil/groundwater/vapors that were present at the time of purchase to allow the buyer to petition the state for an exemption from existing contamination. Think short form Covenant not to Sue.

! The BEA report combines Phase I & II results into DEQ recommended/required format for disclosure to DEQ.

*201 – 6-4-1995/PART 213 3-5-96

BEA/DDCC

Current$AAIICompliant$

Phase$I$ESA

Current$or$Prior$

Phase$II$ESA

Pathway$Analysis

MDEQ$recommended$

template

BEA/DDCC/RAP

+ +

=

Time Frames to Conduct a BEA

A person must conduct a BEA prior to or within 45 days after becoming the owner/operator of a contaminated property. “Conducted” means the AAI or Phase I report, the field work, and sample analysis are all completed and the BEA report is written.

The BEA must be submitted to the DEQ within 6 months after the earlier date of becoming the owner, operator, or of foreclosure to DEQ.

History & Evolution: SBA Interpretation of NFA as a Mitigating Factor

With a technically complete BEA and Due Care Plan the new owner is not liable for existing Contamination provided they exercise Due Care/Continuing Obligations:! Cannot exacerbate the contamination! Must prevent unacceptable exposure to

contaminants and take reasonable precaution against acts of third parties.

! Provide reasonable cooperation, assistance, and access to authorized persons taking response activities at the property

! Comply with land use restrictions associated with response activities

! Not impede the effectiveness of response activities implemented at the property.

! BEA Affirmed – Close SBA Loan – Life is good.

! From 1995/1996 through 2012, the SBA accepted an “affirmed” (i.e. MDEQ reviewed) BEA for current or future use as a means to fulfill the mitigating factor. For a short period required approval of “Due Care Plan”

! Amendments were passed in 2012 which eliminated this option and replaced it with an option to prepare a Documentation of Due Care Compliance (DDCC) Plan, outlining what was done or will be done to maintain compliance for 213 ”Sites” and Response Activity Plans (ResAP) for 201 “Facilities”

! Amended to replace 45 day calendar day review with business day review. ADDING THREE WEEKS.

History & Evolution: SBA Interpretation of NFA as a Mitigating Factor3'more'weeks?'

That’s'a'total'of'9'weeks!

Life'is'not'so'good.

Small Business AdministrationRecent Developments

Satisfying the NFA Mitigating Factor With A BEA and DDCC Plan

! In late 2015, based on a clarification/interpretation of the statute, determined that the option to submit a DDCC for prospective owners/operators (o/o) was removed for LUST Sites (213) from the submission process and can only be based upon current use by the current owner.

! A prospective o/o may submit a Response Activity Plan (RespAP) on 201 (or commingled 201/213) property to outline a proposed use to maintain or achieve due care compliance.

Big Problem for LUST sites! Without the option of submitting a DDCC for a proposed use, prospective

buyers of LUST contaminated (not commingled to allow RespAP) properties may find themselves in a complicated situation for SBA approval.

One of the alternate mitigating factors, such as escrow funds for completing cleanup or becoming the owner and fulfilling the due care obligations and submitting a DDCC are possible, but can represent significantly higher cost and risk and can have an extended timeline. Many are just not possible as borrower needs the SBA loan to purchase the property.

! Note you cannot close loan with escrowed funds, develop the property, as new owner request the DDCC approval and then use that as mitigating factor to release the escrow funds.

! What about liquidations?

! Can the O/O of a Gas Station complete DDCC and let buyer do BEA and rely upon DDCC since uses does not change ?

Pitfalls to avoid! Inadequate investigations, especially with respect to the

vapor intrusion pathway and sub-slab soil gas sampling

! Assuming BEA investigation is sufficient to evaluate for due care obligations - ALL SOURCES AREAS MUST BE INVESTIGATED (sometimes exhaustively)

! Insufficient information regarding contamination to determine complete pathways Not including a scaled site map, only aerial photographs

! Not identifying utility locations on a scaled site map

! Inadequately explaining current or proposed site use

! Inadequately explaining the of history and location(s) of hazardous substances usage on the property

Michigan BEA/DDCC/RAP: Cheat SheetDDCC - LUST current owner/current use vs. Response Activity Plan –Non LUST

proposed owner/proposed new useDDCC Response'Activity'Plan

Outlines$current$compliance$with$due$care$

for$current'use'only for'current'ownerThe$report$is$for$an$intended'use'for'a'prospective'owner/operator OR$a$current$owner/operator$(if$response$activities$are$

required$and$have$not$yet$been$fully$

completed$and/or$implemented).

Can$be$completed$for$Part$201$and$213$

sites.

In$most$cases,$limited'to'Part'201'sites'or'commingled'201/213.

Review$completed$within$45$business$days$

(9'weeks)The$MDEQ$has$a$statutory$requirement$for$

of$150$days$(180$days$if$public$comment$is$

required)$to$review,$if$the$date$is$exceeded,$

the$plan$is$considered$approved.$$$However,$

the$MDEQ$has$been$trying$to$review$with$

45$business$days$(9'weeks),$similar$to$DDCC$

review$timing$requirements.

! Michigan Underground Storage Tank Authority Cleanup Fund. Covers up to $1,000,000 per Owner/Operator per year less deductible. Fund balance $38,500,000

– Deductible amount for O/O with fewer than eight USTs is $2,000 per claim

– $10,000 per claim for the O/O of eight or more USTs

Before

After

Michigan Leaking UST Trust Fund

Final Thoughts! Using the BEA process in

Michigan will remain a viable option for SBA funded purchases.

! LUST site SOP Approval will likely require Escrow, Trust Fund or Private Insurance claim if use will change and buyer needs the loan to become the owner.

! An approved DDCC for same use LUST sites?

! Non-LUST sites or comingled will utilize the BEA with ResAP approval for proposed use

! Make sure you understand the process, timelines, costs and hire a consultant that has a proven track record with the MDEQ.

! Beware of lame excuses why a consultant cannot complete these reports

! A recent one, “The MDEQ is not accepting or reviewing BEA/DDCC because of the Flint Water Crisis.”

Final Thoughts

! The SBA Guaranteed Loan program is a great option that has helped numerous small business owners fulfill their entrepreneurial dreams.

! However, navigating the SBA SOP can be challenging, time consuming and expensive when it comes to environmental matters.

Final Thoughts

! It is imperative that, prior to spending a dime, all stakeholders are aware of what is required to obtain MDEQ and thus SBA approval, the associated costs and timing requirements.

! Therefore, make sure you choose consultants who fully understand the process and can help you to the finish line as efficiently as possible!

The PM TeamMichael T. Kulka, P.E.,

kulka@pmenv.com 800.313.2966