Archive for the ‘Real Estate’ Category

National Flood Insurance and Jersey Shore Demographics

Photo by U.S. Fish & Wildlife Service, some rights reserved.

Back in 1968, Congress stepped into the flood insurance market to provide coverage where private insurers would not. Today, taxpayers back $527 billion of assets in coastal flood plains insured by the National Flood Insurance Program. Run by the Federal Emergency Agency, the program paid out $16 billion of claims for Katrina; Sandy-related claims could reach $12 billion. The program is already $18 billion in debt, as sum the government acknowledges will probably never be covered by higher premiums.

Besides the program’s cost, what is the issue? In New York alone, 200,000 people live less than four feet above the high tide level. Nationwide, the number of people living in flood-prone areas has been increasing, so each natural disaster damages more property and displaces more people than the last. An op-ed in Thursday’s New York Times opines that the time for the federal government to subsidize the insuring of homes and businesses in high-risk flood zones is long past. If property owners cannot find flood insurance on the private market, which in many cases they cannot, they should bear that risk instead of transferring it to the federal government.

One of the implications of changing federal flood insurance would be increased cost of living in coastal areas. Another Times article covers how Sandy and the coming National Flood Insurance Program rate hikes will make “seaside living, once and for all, a luxury only the wealthy can afford.” Building requirements for homes in newly mapped flood hazard zones could effect a demographic shift in the northeast, because much of the development encouraged by subsidized insurance would only be affordable to wealthy buyers.

The wisdom of subsidizing status quo demographics on the Jersey Shore to the tune of $18 billion aside, the point of reducing or eliminating federal flood insurance would be to end the cycle of natural disaster and expensive rebuilding without internalizing the risks of development in flood-prone coastal areas, which in light of recent events are certainly expanding. This is a step toward affordable environmental risk-management most people can back in good conscience.

Local Zoning and Natural Gas in Pennsylvania: Court Rules on Act 13

Klingerstown, Pennsylvania. Photo by Scott Bauer, U.S. Department of Agriculture. Some rights reserved.

In February, the Pennsylvania General Assembly passed the Oil and Gas Act, revising the state’s regulation of oil and gas operations. Among other changes, “Act 13” required uniformity of local ordinances and granted the Pennsylvania Department of Environmental Protection the right to use its discretion in granting variances for distance restrictions from water and wetlands. The natural gas industry saw the legislation as a vital antidote to the maze of constantly changing local zoning ordinances in the gas-rich Marcellus region that leads to expensive litigation and increased production and development costs, but not everyone was cheering for Act 13.

Six townships, several individuals, and an environmental group joined Robinson Township in challenging the Act, and the Commonwealth Court issued their decision declaring the sections described above unconstitutional. The Court’s rationale for overturning the uniform zoning provision was that zoning is a police power of local districts and allowing nonconforming use in zoning districts violates substantive due process. In addition, the provision allowing Pennsylvania’s DEP to grant waivers for setback requirements from water and wetlands was declared null because the law offered insufficient guidance to the DEP regarding waiver standards.

Local zoning and setback issues affect the cost, timing, and even feasibility of natural gas production, so the day after the Court’s decision, Pennsylvania Governor Tom Corbett announced an appeal directly to the Pennsylvania Supreme Court. The dissenting opinion, which according to Reed Smith’s Alert  on the ruling could offer suggestions for the appeal, argued that “incompatible uses” can be allowed in a comprehensive zoning framework, and attacked the majority’s attempt to call on substantive due process protections. It noted that most substantive due process cases regarding zoning challenge the ordinances as too restrictive, while the petitioners in this case do the opposite, which is inconsistent with constitutional zoning precedent. Furthermore, the shortcoming the Court sees in DEP guidance regarding setback waivers appears to be something the legislature could rectify easily, according to a Buchanan, Ingersoll & Rooney memo. Finally, the natural gas industry – barred from intervening in the case at the lower level – will be able to participate in the Supreme Court appeal process by filing amicus briefs.

Private Financing for Energy-Saving Retrofits on the Horizon

Photo by aylamillerntor. Some rights reserved.

As we posted in June, President Obama’s Better Buildings Initiative updated tax incentives aimed to encourage retrofitting buildings to reduce energy bills. Although considered the “low-hanging fruit” of carbon reduction, financing of commercial building retrofits for energy efficiency has largely remained in the realm of public subsidies. Opening the floodgates of private financing could expand the scale and reach of such projects, and a study released Tuesday by the Deutsche Bank Americas Foundation aims to nudge lenders to do just that.

Energy savings projections have accompanied building and financing proposals for some time, but loan underwriters have long looked at these projections with a skeptical eye, rarely incorporating them into underwriting models. There are no consolidated results showing energy savings from subsidized retrofitting projects – around since the Carter administration – nor from the Energy Star programs run by utilities across the country, leaving little data for the underwriting models of financial institutions. Similarly, energy audits are not usually subject to follow-ups and are subject to little accountability. Which is where the Deutsche Bank study comes in.

Analyzing the accuracy and reliability of energy audits associated with more than 230 apartment building retrofitting projects in New York City, the study offers data to instill a measure of confidence in lenders who have generally been reluctant to underwrite energy savings. The Foundation touts that their data-driven findings lay the foundation for lenders and builders to collaborate to develop standards for reporting, best practices, and energy monitoring. The New York City Energy Efficiency Corporation will take this next step, using the data to pilot underwriting guidelines as a starting point for the first transactions that underwrite energy-saving projects.

Accompanying the study is a companion document summarizing the wide ranging benefits of energy efficiency retrofits for building owners and tenants. A New York Times article from June describes the demand for the Deutsche Bank study, and a November article covers some of its early findings.

Marcellus Minerals: Is Marcellus Shale Gas a “Mineral” for the Purposes of Pennsylvania’s Dunham Rule?

Photo by Images_of_Money. Some rights reserved.

Two recent law firm memos (from Fulbright & Jaworski and Pepper Hamilton) tackled the subject when they covered a September 7th decision from the Pennsylvania Superior Court in Butler v. Powers.

The “Dunham Rule” refers to an assumption in Pennsylvania law, wherein a reservation or exception for “minerals” in a deed or lease that does not specifically mention natural gas or oil creates a “presumption that the grantor did not intend for ‘minerals’ to include natural gas or oil.” The Dunham Rule has been around since its namesake case – Dunham v. Kirkpatrick – was decided in 1882.

In Butler v. Powers, a trial court in Susquehanna County had previously found that, based on the application of the Dunham rule, the disputed deed in the case did not include Marcellus Shale gas. However, the Superior Court – without actually deciding on the Dunham Rule’s applicability – remanded the case back to the trial court for determination of the following three things:

(1) whether Marcellus shale constitutes a “mineral”; (2) whether Marcellus shale gas constitutes the type of conventional natural gas contemplated in Dunham and Highland; and (3) whether Marcellus shale is similar to coal to the extent that whoever owns the shale, owns the shale gas.

“Consequently,” the opinion goes on to say, “the parties should have the opportunity to obtain appropriate experts on whether Marcellus shale constitutes a type of mineral such that the gas in it falls within the deed’s reservation.”

But the decision made Pepper Hamilton nervous:

 “Potentially more troubling is the fact that although the dispute between the parties in Butler does not directly involve a deed that explicitly conveys or reserves natural gas rights (since the deed in question used only the terms “minerals” and “petroleum oils,”), the outcome of the case could establish precedent regarding whether a conveyance or lease of oil and gas rights, reserving all other minerals, reserves the unconventional gas trapped in the Marcellus Shale to the mineral title holder.”

Both Pepper Hamilton and Fulbright & Jaworski have pledged to keep a close eye on the case.

“Green Value” and Mortgage Collateral

Image by Oldmaison. Some rights reserved.

In a recent article, law firm Dewey & LeBoeuf addresses head-on how the only-recently-ubiquitous “green” metrics, terminology, and technology in real estate and development have affected building valuation, and, specifically, how one can hedge the risks when green value is lost.

The Dewey & LeBoeuf piece discusses two general ways that “green” that can add value to a building:

First, green “value genera­tors,” that is, green financial benefits, key directly to a building’s cash flow or capital value. Second, green “market enhancers,” such as green ratings or other green attributes, are perceived to add market value even if they do not key directly to cash flow or capital value.

The article then goes on to detail several specific examples, most of which center around the well-known and commercially acknowledged LEED standards. For instance, building owners should be happy to learn that some cities and states offer tax breaks for LEED-qualified construction (value generator), while potential buyers or tenants may be more likely to rent or buy LEED-certified buildings due to their perceived environmental friendliness or potential savings in utilities (market enhancers).

The flip side of these “green” values is that losing something like a LEED certification can be devastating to a building’s worth. As Dewey & LeBoeuf go on to explain,

Failure to achieve a green rating can reduce collateral value in ways “usual” defaults do not. Why? Typically loss of mortgage value follows a real estate market decline when borrowers and tenants go broke and vacancies or defaults wipe out cash flow.

Green defaults are different. The borrower may be paying debt service in a good market, but property value dives with loss of the green rating. Standard mortgage remedies do not protect against such a loss.

Dewey & LeBoeuf recommends due diligence as a lender’s first line of defense, but in the event that a green rating is lost, lenders are urged to “require a third-party guaranty for some or all of the cash flow” or “require the borrower to provide cash collateral or a letter of credit which burns off as the abatement declines.” For further details, check out the full article.

GM’s Toxic Secret: RACER Trust’s Contaminated Properties

Did you know? In October of 2010, “Old” General Motors – now Motors Liquidation Company (MLC) – signed a settlement agreement with the United States (along with 14 states and one tribal government) establishing an environmental trust “to address contamination and position for redevelopment 89 industrial plants and other properties used by the former General Motors but left behind in its 2009 bankruptcy.”

Photo by eek the cat. Some rights reserved.

The Revitalizing Auto Communities Environmental Response (“RACER”) Trust became effective on March 31, 2011.

Of the 89 properties administered by the Trust, 59 are known to have been contaminated with hazardous substances or waste, and, of those, 15 are listed as “priority” sites. “Old” GM has contributed $773 million in assets to the fund, which will go toward the cleanup and administration of the properties and “their return to beneficial use.”

Worried about how bankrupt GM could afford such a bill? Don’t fret – by July of 2009, MLC had been lent $1.175 billion (“for the orderly winding down of MLC’s affairs”) by the US Treasury and Export Development Canada collectively.

At least this money is going to good use: the restoration of these properties provides an opportunity to “restore prosperity and return jobs to areas hit hardest by GM’s reorganization.” More than half of the funds in the Trust will go towards remediation of sites in Michigan and New York. For more information on specific properties, see the RACER Trust Properties Map.

You can find the terms of the Trust in the Environmental Response Trust Agreement, a copy of which was also filed along with MLC’s April 4th, 2011, Form 8-K. Alternatively, you can read an elegant summary of the news in this Pepper Hamilton Alert.

Why Derelict Government Buildings are Like Brownfields, Why that Matters, and Why Paintballers are Paying Attention

Here’s a follow-up on last week’s “Don’t Forget to Turn Off the Lights Before You Leave,” our post about President Obama’s June 2010 directive to the federal government to dispose of unneeded and underutilized property — and about the GAO’s subsequent Testimony, released last week, reporting that the process was hitting a lot of speed bumps.

As the Presidential Memo has it, the disposal of property offers both economic and environmental benefits: the program’s primary hoped-for outcomes are to “eliminate wasteful spending of taxpayer dollars, save energy and water, and further reduce greenhouse gas pollution.” That is, the focus is on the unnecessary consumption of resources.  But I would argue that there is another, perhaps even more important, environmental angle.

Photo by SomeDriftwood. Some rights reserved.

That angle is brought to light when we compare the government building situation to the EPA’s program on brownfields.  A “brownfield” is likewise a property that is in disuse or disrepair — the “expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant.”  (See our October 22 post on the topic.) The EPA’s program is designed to “help revitalize former industrial and commercial sites, turning them from problem properties to productive community use.”

The point isn’t merely that brownfields and neglected government buildings are similar. It’s that the way the EPA frames the problem of brownfields is applicable to both. As the EPA says about brownfields, “Cleaning up and reinvesting in these properties increases local tax bases, facilitates job growth, utilizes existing infrastructure, takes development pressures off of undeveloped, open land, and both improves and protects the environment.”

In other words, brownfields aren’t just bad because they’re eyesores or may be a source of toxicity. They’re also bad because they adversely affect the communities in which they take up physical and psychic space. They contribute to urban blight, and thus to urban (and suburban) sprawl. They are a drag on the larger project of rehabilitating distressed communities.  This is not merely an environmental issue; it is an issue of environmental justice.

Here is how EPA administrator Stephen L. Johnson described the brownfields project at a conference a few years ago:

[L]ast year I visited an inner city neighborhood. And I saw first-hand, that through the work of community leaders, where once stood abandoned buildings and derelict lots, now there is an urban oasis. By replacing plots of rubble with grass and trees, this community is turning urban blight into urban pride, reducing the environmental effects of stormwater runoff, and keeping rainwater out of the city’s overtaxed sewer system.

And just as we see with Brownfields reclamation, advances in the urban environment have led to advances in the urban economy. Through this collaboration, property values have increased by as much as 30 percent. Who would have thought that a little grass could produce such results?

For those of us with front and back yards, a patch of grass might not seem like a big deal. But when I was visiting that neighborhood, I noticed two young girls who were riding their bikes around one of the rehabilitated lots. Where there was once a plot littered with abandoned cars and trash, there is now safe, grassy land for the children of that community to play.

Now, it’s true that vacant and aging government buildings may not be a blight in the same way as plots of land “littered with abandoned cars and trash.”  Yet what that distinction misses is that both spaces have the potential to be transformed into positive, beneficial places.

And that brings up a final, crucial point.  Even if the government does succeed in “disposing” of many of these properties, a happy outcome along the lines of what Stephen Johnson describes above is not a foregone conclusion. Interestingly, one of the few blogs to comment on the recent GAO report is 68caliber.com — which represents, of all interests, paintballers.  This “just might prove to be potential value to paintball businesses,” the blogger writes, in regard to the possibility of some prime real estate opening up.  That’s not (necessarily) to suggest that having paintball centers in urban areas would be a detriment, environmental or otherwise.  But it is a reminder that how these derelict buildings are reinvented could be just as important as whether they are reinvented.

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