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Environmental Risks of Acquiring Property by Foreclosure

December 2010

Citation: 40 ELR 11211

Issue: 12

Author: James Brennan and Thomas A. Utzinger

Lenders, bondholders, and other holders of interests in commercial and industrial real estate, beware the decision to foreclose on properties contaminated by hazardous substances. The "long claws" of environmental laws can threaten real estate lenders and securitized bondholders alike. The laws and policies governing the meaning of what constitutes "ownership" or "operation" for the purpose of environmental liability must be carefully understood, as foreclosure may alleviate troubled loan portfolios but, in turn, may lead to a broader set of troubles. This topic is ripe for review during this current economic climate, as the need to address above-average numbers of foreclosures in a timely manner can compromise full compliance with environmental laws.

As if the myriad challenges in real estate today, with credit market troubles, tightened lending standards, and a maturity cliff veering troublingly close, were not enough, the lending and financial community must also be aware of certain environmental laws that can sweep in a broad cast of parties lacking the intention or desire to be responsible for significant cleanup costs. This cast of "responsible parties" includes not only past and present property owners, but also lenders and even securitized bondholders.

James Brennan is Corporate Counsel of 1031 Exchange Solutions Group. Thomas A. Utzinger is an environmental attorney practicing in New Jersey, New York, and Washington, D.C., with experience in regulatory compliance and environmental issues in transactions.

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