Distressed Property Due Diligence Tax Breaks, Incentives And Other Issues Impacting Value.Ngm.4 29 09.Secure

International Council of Shopping Centers
In cooperation with the

State Bar of Michigan

Presents

ICSC 2009 Michigan Continuing Education
for Real Estate Professionals
ROCK FINANCIAL SHOWPLACE, NOVI, MICHIGAN
WEDNESDAY, APRIL 29, 2009

Distressed Property Due Diligence: Tax
Breaks, Incentives and Other Issues
Impacting Value

Presented By:

Nicholas G. Maloof, Esq., RPG
President and General Counsel
Associated Environmental Services, LLC

Page 1 of 9
6001 North Adams Road, Suite 203
Bloomfield Hills, Michigan 48304
Tel: (248) 203-9898, ext. 104
Fax (248) 203-9372
Environmental Services Email: ngm@associatedenvironmental.net
Land Development Web: www.associatedenvironmental.net
Real Estate Consulting
Copyright©2009 Associated Environmental Services, LLC. All rights reserved.

Distressed Property Due Diligence: Tax Breaks, Incentives
and Other Issues Impacting Value

Distressed Property – Commonly viewed as a property that is the subject of a workout,
foreclosure or bankruptcy proceeding

Definitions of “distressed property” on the Web via Google Search:

I. 1. Property that is in poor physical condition. 2. Property owned by an individual who is in
poor financial condition. debbie.canequity.com/mortgage-resources/
II. A property which is to be sold in order to pay arrears on a mortgage. www.gibbons-
realty.com/dictionary/D.html
III. Property which either is in a dilapidated physical condition or is owned by an individual
who is undergoing a period of economical instability.
www.dreamtown.com/mortgage/mortgage-terms.html
IV. A mortgaged property which has been foreclosed on. www.bettisu.com/
V. Real estate that is under foreclosure or impending foreclosure because of insufficient
income production or mortgage payment. www.propertyaxess.com/GlossaryofTerms.htm
VI. Property that is under a foreclosure order or is advertised for sale by its mortgagee.
Distressed property usually fetches a price that is much below its market value.
http://www.businessdictionary.com/definition/distressed-property.html

In the event of default by a borrower, the lender has several alternative courses they can pursue:

1. Take no action and hope that the default remedies itself;
2. Require additional collateral and/or guarantees from the borrower;
3. Restructure the indebtedness with a longer amortization, lower interest rate, principal
only payments or other loan alteration(s);
4. Temporarily suspend pursuing additional remedies against the borrower by agreeing to
a forbearance. Forbearance is refraining from doing something that one has a legal right
to do. In this case, it would be to not to enforce a claim(s) upon loan maturation and/or
provide additional time for repayment of the loan;
5. Accept a discounted payoff of the indebtedness; or
6. Foreclose on the loan and sell the collateral (real property) by either selling the note at a
discount or by taking physical possession and title and marketing the property. Another
alternative is to have a Receiver appointed by the courts to marshal and sell the asset(s).

Items 1-5 referenced above are typically encountered in the “workout” phase of a potential
foreclosure and are a joint attempt by the borrower and the lender to salvage a valuable property

Page 2 of 9
Tel: (248) 203-9898, ext. 104
Fax (248) 203-9372

and avoid the delays and expense generated in a foreclosure. If a deal can be made, it will likely
benefit both parties to the loan (lender and borrower).

A workout can also preclude any potential harm that may mar a project's reputation due to a
default. The risk of harm to a project from a default due to lost sales or shaken confidence may
eventually lead to a foreclosure or a bankruptcy filing.

An effective and successful workout requires that both parties take reasonable steps to protect the
value of the collateral in order to maximize its ultimate worth and thereby protect the
investments of both the borrower and the lender in the project. A workout requires that both
parties to the transaction have faith in the other.

Each workout situation is distinct and usually is the result of a sudden and dramatic shift in
project specific market factors or the market in general. The lynch pin to a successful workout is
a recognition by both parties (borrower and lender) that under the correct set of circumstances
the property or project can be turned around and successfully completed. Workouts should only
be attempted for properties that have a chance for success, even if the likelihood for this is small.
Attempting a workout of a property that is in such a bad or difficult situation or state of affairs
that success would be unlikely may further compromise the loan collateral and financial position
of the lender.

In the event that both parties determine that a workout is appropriate, it is imperative to act as
expeditiously as possible or there is a risk of one or both parties changing their minds or the
value further declining and throwing off the deal parameters. This is also applicable to a
prospective purchaser of a defaulted asset – the longer it takes to get the deal closed the
higher the likelihood of losing the purchaser due to market forces, changes in value of the
collateral or both.

Workout, Foreclosure and Bankruptcy Due Diligence
Workout Due Diligence
♦ What is the current condition of the collateral?
♦ Was environmental due diligence conducted when the loan was made? Was it conducted
properly (was all of the research conducted or was it a white wash)?
♦ Was the collateral contaminated when the loan was made?
♦ Are the current operations of a high-risk nature (gas station, dry cleaner, industrial, etc.)?
♦ Are there any adjacent high-risk uses to the collateral that could have a direct or indirect
impact?
♦ Are there any issues that could impact the value of the collateral or require out of pocket
costs by the lender if the property is foreclosed upon?
o If there is impact, can the impact be used as a selling feature to attract a new
developer or purchaser by positioning the property for development incentives?

Page 3 of 9
Tel: (248) 203-9898, ext. 104
Fax (248) 203-9372

Foreclosure Due Diligence
♦ What is the current condition of the collateral?
♦ Was environmental due diligence conducted when the loan was made? Was it conducted
properly (was all of the research conducted or was it a white wash)?
♦ Was the collateral contaminated when the loan was made?
o If so, by the borrower or a prior owner/operator (historical impact)?
o If the impact is historical, did the borrower conduct appropriate due diligence
(Phase II ESA, BEA, 7a Due Care Plan, etc.)?
impact?
♦ Is the lender planning to take title, is a Receiver going to be appointed or is the Note
being sold at a discount?
o If the Note is being sold, the lender may only need a cursory investigation to
evaluate the value of the underlying collateral;
o If a Receiver is being appointed, it may make sense for the Receiver to conduct
pre-acquisition due diligence to determine the condition of the collateral prior to
or within a short period of time of being appointed Receiver;
o If the lender is foreclosing and taking title, a thorough investigation should be
undertaken to determine the condition of the property and whether the lender
needs to prepare a Baseline Environmental Assessment (BEA) prior to taking
title, possession or occupancy.
costs by the lender if the property is foreclosed upon?

Bankruptcy Due Diligence
♦ What is the current condition of the real property?
♦ Was environmental due diligence conducted when the Bankruptcy Trustee took
possession/title to the real property?
♦ Is the real property contaminated?
o If so, by the Bankrupt Estate or is the impact historical?
o If the impact is historical, did the preceding entity in title (a.k.a. Bankrupt Estate)
conduct appropriate due diligence (Phase II ESA, BEA, 7a Due Care Plan, etc.)?
impact?
costs by the Bankruptcy Trustee?

Page 4 of 9
Tel: (248) 203-9898, ext. 104
Fax (248) 203-9372

Critical Questions for Due Diligence Activities
In the case of a Workout or Foreclosure, who retains the consultants and other professionals?
♦ The Lender?
♦ The Lender’s Attorney?
♦ The Receiver?
♦ The Receiver’s Attorney?

What liabilities/opportunities does a contaminated asset hold?
♦ Liabilities
o Costs related to securing the operation
o Costs/duties related to cleaning up abandoned wastes, chemicals, etc. from
ongoing operations
o Costs/duties related to cleaning up historical wastes, chemicals, etc. from former
operations
o Costs related to Due Care Obligations to render the site safe for its current or
intended use
o Securing the asset to ready it for sale

♦ Opportunities
o Is the contamination an impediment to a potential sale?
♦ If so, it must be remedied or a potential remedy must be worked out ahead
of a potential sale
o Is there a potential buyer?
♦ If so, is the buyer sophisticated or a newbie?
♦ Do the buyer and/or their lender understand the issues/opportunities with
the property?
o What plan(s) does the buyer have for the property?
o Is there a gap in value due to perceived/known contamination and costs to
remedy?
o Is the buyer planning an investment into the property?
♦ Has the buyer reviewed the potential incentives associated with the
potential investment?

As part of a loan workout or foreclosure, the lender needs to perform pre-workout or pre-
foreclosure due diligence in order to identify the property's difficulties and whether they can be
overcome. Due diligence activities must include a review and analysis of the following in order
to better understand the property:

1. loan documents;
2. leases, if any;
3. construction documents, if any;
4. development and construction financing documents, if any;
5. current title and available land survey;
Page 5 of 9
Tel: (248) 203-9898, ext. 104
Fax (248) 203-9372

6. environmental reports; and
7. engineering reports.

The lender should also obtain an updated appraisal and environmental assessment of the
property as the appraiser will value the property without taking environmental condition
into account and a competently performed environmental assessment should identify any
current or historical issues that may impact the value of the property. The lender should
also look at any structural deficiencies, defects or repair items for existing structures and obtain a
repair estimate for these items as well.

Many of the above referenced documents and reports are usually already in the lender's files,
however, they should be updated as it is highly probable that environmental, structural and value
related issues will be identified on the property that should have been obvious when the loan was
originally made, but in the torrent of the events leading to the closing, were not. Many lenders
use a different counsel for a workout than the one that represented them in the original
transaction in order to make certain that any possible errors made during the initial loan process
are not covered up.

Probably the most critical decisions for any lender to make is whether to foreclose on a
mortgage; exercise the power of sale; have a Receiver appointed; or take control of the property
and replace the owner. This decision should never be taken without considering all the
advantages, disadvantages and risks a lender can face because of a foreclosure. Notwithstanding
the foregoing, if the lender has no confidence in the current owner (borrower's) ability to salvage
the property, there may have little choice but to foreclose and sell the collateral, either directly or
indirectly via a Receiver.

Case Studies in Workout and Foreclosure Properties
Example #1 - Multi-family Residential Rental Complex

Scenario: AES was retained by a foreclosing lender to review a previously prepared Phase I
Environmental Site Assessment (ESA) and determine whether a Phase II ESA was necessary for
pre-foreclosure due diligence purposes. AES reviewed the report and concurred with the Phase I
ESA recommendation that a Phase II ESA was necessary to investigate the historical use of the
property as an orchard due to the high probability of the historical use of herbicides and
pesticides at the site (lead arsenate, DDT, etc.). AES prepared a scope of work to assess the
areas of the subject property that were identified as containing the former orchard as well as
areas that were outside the suspected area in order to determine the impacted areas, if any. AES
drilled twenty-six (26) soil borings and analyzed the samples for arsenic, lead, herbicides and
pesticides. The suspected area of the former orchard was confirmed to contain arsenic in excess
of the Michigan Department of Environmental Quality (MDEQ) Generic Residential Cleanup
Criteria (GRCC) for Direct Contact (DC) at a depth between .5 and 1 foot below the ground
surface. AES advised the client that should it wish to foreclose that a Baseline Environmental

Page 6 of 9
Tel: (248) 203-9898, ext. 104
Fax (248) 203-9372

Assessment (BEA) would be required and that a 7a Due Care Plan must be prepared to address
the arsenic concentrations exceeding MDEQ GRCC for DC. In addition, AES was requested to
prepare a rough cost estimate for further investigation and remediation of the impacted soils.

Outcome: The lender ultimately sold the Note at a discount rather than spend the additional
capital required for continued due diligence and remediation activities. The main driver behind
the lender’s decision to sell the Note and not foreclose was not necessarily cleanup liability, but
potential tort liability from exposures to arsenic contaminated soils.

Example #2 - Recreational Property

Scenario: AES was retained by legal counsel representing a Court Appointed Receiver,
appointed at the request of a lender, to prepare a Phase I ESA for a potential sale of the collateral
(real property). AES identified a number of RECs related to the property and recommended that
a Phase II ESA was necessary for pre-foreclosure or pre-sale due diligence purposes. AES
drilled fourteen (14) soil borings adjacent to existing ASTs, former USTs and adjacent to floor
drains inside a service building. The property was contaminated with petroleum hydrocarbons
and qualified as a “facility.”

Outcome: As the existing uses and operations would be continuing under the new purchaser,
AES recommended that a Category “S” BEA and 7a Due Care Plan be prepared for the potential
new purchaser and that Engineering Controls be installed in all high-risk areas to prevent
exacerbation of the existing contamination.

Example #3 - Multi-tenant Industrial Property

Scenario: AES was retained by a foreclosing lender to prepare a Phase I ESA for
foreclosure and potential sale of the collateral (real property). AES identified a number of RECs
related to the historical use of the property and recommended that a Phase II ESA was necessary
for pre-foreclosure due diligence purposes. It should be noted that three prior Phase I ESAs
conducted on the property failed to identify the historical use of chlorinated solvents and related
complaints of releases due to the fact that the national company hired to conduct them failed to
check the local municipality’s Building and Fire Department files – even though they were
retained to do so.

Outcome: AES drilled fifteen (15) soil borings inside the buildings within the suites/units
identified with the suspect high-risk past uses. The property was identified as being
contaminated with perchloroethylene, a chlorinated solvent, caused by a former tenant, in excess
of MDEQ GRCC and qualified as a “facility.” AES recommended that a Category “D” BEA and
7a Due Care Plan be prepared for the foreclosing lender and that Engineering Controls be
installed in all high-risk areas to prevent exacerbation of the existing contamination and/or
contamination by the current tenants of the building with different chemicals.

Page 7 of 9
Tel: (248) 203-9898, ext. 104
Fax (248) 203-9372

Incentives
There are numerous environmentally related incentives that could be used for an eligible
property to enhance its sale-ability or develop-ability as well as its ultimate value to the Lender,
Receiver or Trustee. A number of factors affecting these incentives include, but are not limited
to:

1. the physical location of the property;
2. the current environmental condition of the property;
3. the proposed investment in the property;
4. the number and type of jobs being created, if any;
5. the type of development;
6. the municipality where the property is located, etc.

Available incentives include, but are not limited to, the following:

♦ Tax Increment Financing (TIF);
♦ Brownfield Michigan Business Tax (MBT) Credits;
♦ Michigan Economic Growth Authority (MEGA) Credits;
♦ Local, County, State and Federal Grants and Loans;
♦ Neighborhood Enterprise Zone (NEZ);
♦ Obsolete Property Rehabilitation Act (OPRA);
♦ Renaissance Zones;
♦ Industrial Facilities Tax Abatement (IFTA) under P.A. 198
♦ MDEQ Superfund Section Brownfield Redevelopment Assessment Investigations (to
local units of government and developers);
♦ Clean Michigan Initiative (CMI) Waterfront Redevelopment Grants (WRG);
♦ USEPA and MDEQ Revolving Loan Funds (RLF);
♦ Historic Tax Credits;
♦ New Market Tax Credits (NMTCs);
♦ Low Income Housing Tax Credits (LIHTCs);
♦ Federal and State of Michigan Alternative Energy Credits; and
♦ Numerous others!

How the myriad of economic incentives is used to leverage a possible transaction or
development is highly specific to each property/deal and depends upon:

1. the parameters of the deal;
2. the amount over and above the purchase price being invested into the property to
create improvements, create jobs or maintain jobs within the local municipality
and State of Michigan;
3. the attitude of local and state governmental officials toward the proposed project;

Page 8 of 9
Tel: (248) 203-9898, ext. 104
Fax (248) 203-9372

4. the availability of a particular incentive (some incentives such as RLF, MBT
Credits, etc. only have limited allocations);
5. how the mix of incentives work together or cancel each other out and tweaking
these incentives (the term “layering” of incentives is currently in vogue) to offer
maximum return on investment.

Remember that each project is unique and the number, type and value of Economic Incentives
applicable to a project will vary based upon the site conditions, type of investment being made,
motives of the parties, timing and a multitude of other factors – no two deals are ever the same.

Take Away Points for the Real Estate Broker
♦ Understand the motives of all parties in a Workout, Foreclosure or Bankruptcy
transaction;
♦ Understand the property, its condition and the process track the property is following –
know that it could change at any time;
♦ Make sure to get all listing and representation agreements signed by the appropriate party
and know whom you are working for (i.e., where does your fiduciary duty lie?)
♦ Explore the options available for the property from an Economic Incentive standpoint –
what about this property (its location, condition, etc.), the deal, the parties, etc. make the
property or deal eligible or could make the property or deal eligible?
♦ If you need assistance understanding the myriad of issues with an Economic Incentive
deal, call your trusted advisors and pick their brain (just make sure they really know what
they are talking about!).

For questions or to discuss a matter in confidence, please feel free to contact me.

Nicholas G. Maloof is President and General Counsel of Associated Environmental Services, LLC (AES), an
environmental services, land development and real estate consulting firm based in Bloomfield Hills, Michigan. Mr.
Maloof is an active member of the State Bar of Michigan and has over ten years of experience as a transactional
attorney and over nineteen years of experience in the field of environmental and real estate consulting. A majority
of his work is conducted with or on behalf of attorneys, financial institutions, developers, investors, property owners
and real estate brokers. He is also a Registered Professional Geologist in the State of Tennessee and a licensed Real
Estate Broker and Title Insurance Resident Producer in the State of Michigan.

Mr. Maloof has advocated and been involved in what would become known as Brownfield Redevelopment since
1989 when Site Reclamation Fund Grants first became available. Over the past 19 years, Mr. Maloof has been
involved in thousands of real estate transactions and land development projects from a site selection, due diligence
and development entitlement standpoint, as well as numerous Brownfield Redevelopment projects throughout
Michigan.

Page 9 of 9
Tel: (248) 203-9898, ext. 104
Fax (248) 203-9372

Distressed Property Due Diligence Tax Breaks, Incentives And Other Issues Impacting Value.Ngm.4 29 09.Secure

Recomendados

Recomendados

Más contenido relacionado

Similar a Distressed Property Due Diligence Tax Breaks, Incentives And Other Issues Impacting Value.Ngm.4 29 09.Secure

Similar a Distressed Property Due Diligence Tax Breaks, Incentives And Other Issues Impacting Value.Ngm.4 29 09.Secure (20)

Distressed Property Due Diligence Tax Breaks, Incentives And Other Issues Impacting Value.Ngm.4 29 09.Secure